For close to 60 years I have had the opportunity to look at and admire the expansion of infrastructure as the base for economic growth; also interacted with experts of multilateral and bilateral funding agencies like ADB, European Central Bank, IMF, KfW and the World Bank and with policymakers at the Centre and several states. I observed several distinct stages: in the early part of 1950s and 1960s, funding from multilateral and bilateral agencies was a boon to conceive large industrial and infrastructure projects – hydro electric projects, steel and power equipment plants and a vast range of water supply and sanitation projects spread across the country.
LIBERAL EXTERNAL FUNDING…
The terms were highly attractive. World Bank, KfW and others extended soft loans spread over 40 years with a moratorium of ten years and interest at three-fourths of one per cent. I witnessed the terrific impact of these in several projects. I cite one relating to the Neyveli Lignite Corporation in Tamil Nadu.
Around 1960, KfW extended a loan of 1000 million deutsche mark (DM) for the development of open cast mines at Neyveli to produce lignite for power generation. At the exchange value of Rs 1.30/DM, this amounted to Rs 130 crore. Indian has the reputation for prompt repayment of such loans. So by the early 1990s, half the loan, DM 500 million, was repaid.
But in the 30 years the rupee suffered massive depreciation against major currencies including the DM which was valued close to Rs 25/DM. This meant the dues to KfW, of DM 500 million, were at Rs 1250 crore, more than nine times the original loan taken in terms of the Indian currency!
The experience is similar in regard to loans designated in dollars or yen extended by World Bank and other lenders, availed for water supply and drainage schemes, development of railway and road transportation… that do not generate foreign exchange.
For two decades there has been increasing focus on infrastructure spend. The high economic growth years from the early 2000s and a liberal global environment helped in conceiving bigger plans and larger allocations. The national highway development programme and ultra-mega power projects are a couple of examples of this interest. Dr Manmohan Singh as Prime Minister made frequent references to the need to step up investments in infrastructure projects. This interest has continued with the Modi government.
Well-structured…
The Asset Monetisation Pipeline (AMP) appears a well-structured concept to attempt a quantum expansion of infrastructure.
With increasing fiscal deficits, especially after the onslaught of the Covid-19 pandemic, finances of the Centre and the states are under severe pressure. But infrastructure development can’t be delayed. Vinayak Chatterjee estimates the annual requirement at $ 7.5 billion, three times the average annual infrastructure spends in recent years. In this light, the AMP promises a welcome alternative.
As part of its efforts at expansion of awareness on economic issues through lectures and seminars, IE presented this webinar. This was supported by CII (SR). We presented the renowned economist and former Vice Chairman of the Planning Commission M S Ahluwalia, expert on infrastructure Vinayak Chatterjee, Addl Chief Secretary, Finance – TN S Krishnan and Vice Chairman-Hinduja Group R Seshasayee.Excerpts from the presentations:
AMP not just for annuity, but to create more assets…
R Seshasayee – Executive Vice Chairman, Hinduja Group
It is good that AMP is not a one-off thing. It is a continuing process, not something being looked at only from the point of view of fiscal management.
The pipeline…
What sort of pipeline should this be? The government indicated the kind of assets that are going to be put on this pipeline starting with roads, power transmission, warehouses and airports.
But is there a philosophy that we need to adhere to in terms of putting up these assets? For example, assets which cater to public goods and public services; or is it more of those that have commercial viability and cater to commercial interests?
Do we also have a larger agenda, to build large, private entities having the expertise in a particular area? For example, when we look at airports, are we going to look at companies which will have the expertise of managing multiple airports across the country and across the world. Because eventually the capability built inside the country could also be used for marketing it in the world outside. Should we thus have a larger agenda to build organisations with heft and expertise to become global players?
If you start doing that, are we likely to slip into the trap of building monopolistic organisations? Can we ensure that there is enough competition and yet enough critical mass of ability and the expertise in building these operations?
We need an outcome of not merely having an asset taken up for the purpose of earning an annuity, but using that as the nucleus for building an enterprise capable of competing not just in India but globally.
So a certain framework is needed within which this pipeline has to be built.
Monetisation…
We’ll move to the middle word, monetisation. Is it an euphemism for privatisation, although we’re not handing over the assets because of emotions on selling family silver. In essence, the government is signalling that they believe private management will bring about greater efficiency and productivity. This is a good signal from the government.
Then it raises the question: in what manner are we going to ensure that the brand promises efficiency and productivity, reflected in the user charges and significantly higher quality of services?
We have seen models where bids were received and won. The most competitive user charges had resulted in corporations getting into serious financial challenges causing big holes in the balance sheets of banks.
We’ve also seen very efficient delivery of services and the softening of rates as a result of private enterprises coming into areas like power transmission. This is a classic case where we have seen user charges remaining the lowest.
Faulty criteria for selection resulted in a very high degree of NPAs as in the cases of power, road building… So how do we make sure that when the process of selection was over and the evaluation done, the asset delivers on the promise of a lower user charge, a higher service capability and the ability to expand?
Asset…
Then you come to the third, relating to assets. Should this be confined to the very large portfolio of brownfield assets of the government? If that is what we want to do, we are likely to attract investors who would be content to have annuities, not necessarily the ability or the enterprise to develop beyond. Don’t we want to use AMP as an instrument for stroking enterprise, incentivising more asset-creation?
For example, if the government offered a brownfield asset of a road under AMP, can that tag along real estate development? Can there be a township developed by linking a few roads together, a few power stations together ? The asset is a nucleus around which we want to develop enterprise, provide the incentive for the new entrepreneur to come in and create new assets and not merely monetise an existing asset to receive an annuity.
Selling family silver to buy more silver
M S Ahluwalia – Economist and former Deputy Chairman, Planning Commission
We address infrastructure development through two separate strands – the National Infrastructure Pipeline (NIP) and the Assets Monetisation Pipeline (AMP).
There is consensus on building the NIP through public private partnership (PPP). In this mode private sector is brought in for the creation of new infrastructure.
There are green field and brown field investments. Traditionally green field investments have been taken care of by the government. However, certain green field projects can also be built on pure private investment. If the
tariffs are good enough, enterprises will come. For some of these they may need some support. In the olden days the government provided 30 per cent of the capital cost. However, certain infrastructure like roads in rural and remote areas will have to be built through public sector.
Welcome agreement on higher fiscal deficits…
There is a welcome agreement to go for higher level of fiscal deficits. The NIP projects are planned upto 2025. Over this period there should be no worry over having fiscal deficits exceeding the settled limits.
Monetisation of existing assets provides a useful source of revenue to finance infrastructure. If the realisation of revenue through selling existing assets are used to create more assets, you would be actually selling the family silver for buying more silver.
There is a belief that the private sector would be more efficient. But government doesn’t like admitting this because people will accuse the government as anti-public sector.
The problem in the public sector is the totality of the governance structure just does not lend itself to efficiency. It may not be true in every case: in the past it was dependent on the personal relationship between the head of the organisation and the political support that it got: V Krishnamurthy, for example, was a hugely successful public sector manager who had political backing from the prime minister’s office at the times of both Indira Gandhi and Rajiv Gandhi. So, he could literally ignore the industry minister which he had mentioned in his own biography! If he had succumbed to what the then industry minister wanted, we would not have had Maruti, but would have had some lousy lower grade European car and we would not have had an automobile revolution. Thus, it doesn’t mean the public sector doesn’t have skilled people. But our governance system makes it the exception that such people are actually allowed to manage.
I wouldn’t say that the private sector is best in everything. Health infra has real issues and should not be given entirely to the private sector. We need standardised settings to establish a world-class public health system.
Competitive, transparent bidding…
There has to be competitive bidding to address problems like cronyism. If you have a transparent systems of bidding and genuine competitive bidding, then you are actually giving it to the person who paid the most. You can add something to that by having a reasonable minimum bid.
A real tough one applies to all private sector infrastructure: you hand over an infrastructure facility to someone on certain specified terms. What if they resiled on these?
We faced a problem during UPA1 and UPA2 regimes. Private sector guys said that they bade with the expectation of things not changing; and if things changed, how could the government expect them to adhere to their original promise?
The short answer is, you are a competent buyer, a competent bidder and a competent businessman; these are the risks you work out. You win some and lose some. But they said that’s perfectly okay over a 3-5 year horizon, but the contract is for 30 – 40 years. We can’t anticipate the situation 10 years from now.
Many businessmen feel the use of the term public private partnership is wrong because the government chooses them. Once chosen, they are not partners, but actually captives! When circumstances changed the government was not in a position to change the terms of the agreement, there arises a serious problem.
When an officer has to make a decision, he is generally not going to be willing to give a concession to the private partner because he’s going to assume that private partners should absorb the loss. When they can’t absorb the loss; things get stuck, operations get delayed.
In the private sector, they’re willing to take the decision to alter the terms. In the public sector they are not and it’s not the fault of the officer. It has to be something decided outside the ministry, in the prime minister’s office.
We should have a PPP law make all PPP come under the framework of the law and then be guided by the terms of the law.
Take all stakeholders along…
S Krishnan, IAS – Additional Chief Secretary, TN Finance
TN Chief Minister has raised certain issues with the prime minister on the asset management plan. Most of these centres around adequate consultation with the stakeholders. Often we fail in management by not taking everybody along.
Today the criticism is that you’re selling family silver. It is justified because a number of people involved have not been taken onboard.
I provide an example of productive asset monetisation: in TN, government hospitals render a variety of diagnostic services including MRIs and CT scans through innovative access to assets. The Tamil Nadu Medical Services Corporation hires equipment; the supplier of the equipment gets paid on a per use basis; the user pays as per his/her capacity. Such expensive equipment, normally available only in private hospitals, is made available in a number of government hospitals.
When you are able to establish that the quality of service is good, people are willing to pay for it without much opposition, then I think we’ve achieved the much bigger objective. The minute you try to brand this, make it into one big uniform exercise, you create a suspicion of trying to sell public assets.
An important message in this is the need to respect a federal structure, to respect different parts of the country to find their own ways of implementing such a plan. They can manage it in different ways at different places.
No value for state’s land…
In the current scheme of things Central ministries have largely gained and one agency that loses heavily is the state government. The reason: many of the Central PSUs own lands that were bought cheap or given virtually free by state entities. When Hindustan Teleprinters got privatised, the original teleprinter business carried there, was closed. What was left was the real estate (whose value has skyrocketed). It’s usually the taxpayers of states who have ended up paying for it.
The difficulty we will face in the next round is the value of land that relates to the railways or defence. Almost all the land held by the defence establishment today is a colonial hangover. If the state takes a little bit of defence land, it has to give land of equivalent value somewhere else, for which defence department may have no use. I don’t think either in Secunderabad, Chennai or Bengaluru any of this land is of strategic importance for defence.
It’s a one-way relationship in a number of ways in which only one set of stakeholders get compensated.
Resources through non-debt
Fiscal deficits are certainly a problem. We have to find non-debt creating instruments to raise resources. Tolling roads is the most logical way of doing it. Wherever the Tamil Nadu Transmission Company (Tantransco) laid high tension lines for transmission of power, it also laid optic fibre cable lines. Clearly that’s an asset which needs to be monetised without selling. There are many such resources which can be monetised in a way that worked for all stakeholders.
Even when consultants are hired, most consultancy firms don’t provide the best consultants to handle government contracts. There’s clearly a capacity constraint of how much can be done and how quickly.
There is the whole issue of contract renegotiation. It’s very difficult to foresee issues which may arise in a long term contract. It might become completely unworkable at some point in time. Government structures often are not designed to look at contracts over a 25-30-year period. There is lack of needed continuity and create structures to uphold the sanctity of a long-term contract. How do you face the auditors and the CAG scrutinies? How do you protect yourself when the same thing goes for litigation?
There is the issue of organisation culture and commitment. Private sector has some advantages: it’s more nimble; it can come in and out of sectors at various points in time. If the private agency fails, there’s still a sovereign responsibility of the government to find an alternative and continue service delivery.
Reset PPP on war footing…
Vinayak Chatterjee – Infrastructure Sector Expert and Chairman of CII’s National Council on Infrastructure
The National Monetisation Pipeline [NMP] as an economic strategy for the nation is inevitable. There are three forces that work simultaneously.
The first: infrastructure risk falls into three buckets: development risk, construction risk and operating risk. In the early days of public private partnerships (PPP), we offered green field projects in power, roads, ports, airports… The hardest parts related to development and construction and these would led to operational risk.
The second: NMP clearly recognises that there is really very little confidence in and appetite for private investors in the first two stages of development and construction.We are now asking private capital to come in at the last, less risky stage.
The third: recognition of the reality of domestic and large international capital coming in a big way for operating green field projects – Canadian pension funds, Swedish funds, Singapore funds, the Gulf funds… all sovereign funds, insurance funds or pension funds that offer long-term capital look at annuity. We have to offer them operating brown field assets which have demonstrated stable or semi-stable cash flows.
NMP plan recognises these three ground realities and carves a scheme to monetize brown field assets and recycle the money till the PPP mode is reset. Let the government structure the first two portions of development risk and construction risk and operate through EPC companies; when EPC has delivered, probably in a year or two, the asset will be ready for monetisation. So there is a correlation between NIP and NMP which, if properly executed, leads to a virtuous cycle.
NMP does provide a window for state’s share
At the NMP scheme, the Central government does provide some window for the state’s share in privatizing state-owned Central utilities. It recognises that if states make an effort the Central government will go out of its way to compensate.
average spend Rs 2.5 crore p.a. but Need Rs 7.5 lakh crore p.a.
How much PPP and how much private capital are to be raised now? The NIP is for Rs 111 lakh crore for five years, roughly Rs 20 lakh crore p.a.; of which30 per cent is to come from private capital; that is, Rs 6 lakh crore.
The NMP is a four-year programme of Rs 6 lakh crore or Rs 1.5 lakh crore p.a. of which 100 per cent is going to come from private capital.
Thus the need is a humungous Rs 7.5 lakh crore p.a. But Rs 2.5 lakh crore p.a. is the maximum private capital we have mobilised for green field and brown field infra in the last three years.
In the context of current capital shortage both in public expenditure, on private sector balance sheets, we have to reset PPP on war footing.
Revisit Kelkar Committee and Jaitley’s 3P India
The Kelkar committee addressed this issue in detail with recommendations to reset PPP. It touched issues of independent regulation, renegotiation, protection of bureaucrats from arbitrary enquiries even post-retirement … The committee was set up by the present government and it has a moral obligation to address the recommendations.
In his first budget speech in July 2014, then Finance Minister Arun Jaitley set aside Rs 500 crore to set up a PPP knowledge foundation called 3PIndia.He was well advised by leading economists that if we didn’t have an impartial, neutral, knowledge-sharing central institution to manage, the PPP process is likely to go haywire. And this is precisely how we had gone in the last two bids of the Indian railways’ privatisation bid: they attracted 113 interested parties in the pre-bid conferences; when the bids opened, there were only two bids. The PPP formating was all wrong.
We need a central repository of knowledge with a mandate to act and do quality control. We need a 3PIndia to harmonise the PPP movement over and above the recommending committee and implementing committee.
There is a widespread fear of crony capitalism in the award of infrastructure bids. It is a clear and palpable fear and that needs to be addressed by assuring the public, at state and the Central level, that the bids are transparent.
Another important requirement is to ring-fence the process of monetisation. We have a history of different governments’ misusing funds that should be used only for further development of infrastructure.
