Governance | Infrastructure, Finance and Governance
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| "As a citizen, I am looking for some healthcare solutions. I am talking about education and infrastructure, and not just technology." —Nandu Pradhan, Red Hat India |
What is not talked about here is that the rural areas of a country require the same facilities that are available to their urban counterparts. So, infrastructure, finance and governance have to be inclusive in nature, if growth has to touch all sections of society. What is also important here is to understand, as M Ramachandran, Secretary, Ministry of Urban Development, puts it: "it is necessary that we sustain the development of our urban infrastructure if we are to sustain our overall growth."
According to a recent OECD study, over the next 20 years, global demand is largely coming from the fast-growing BRIC (Brazil, Russia, India and China) economies than from the Western world as had been the case until now. It monetises the global investment in infrastructure during this period at about $40 trillion, with demand for about $10 trillion of this coming from India and China alone. The study acknowledges that even today at the existing rates of financing, there is a significant gap globally for funding infrastructure. "Add to this, the pressures of urbanisation, with roughly about 40 per cent of India and about 61 per cent of China getting urbanised over the next 20 years, adding 700 million more people on the urban stage."
Today, India, as Ramachandran pointed out, "faces a huge deficit: in infrastructure, in finance and in governance." That these are huge challenges is clear from the fact that if we just look at the country's urban sector, the investment needs under the Jawaharlal Nehru National Urban Renewal Mission for the 63 mission are pegged at Rs 335,000 crore in the seven-year programme period. And, if one considers the other urban facilities and the rural sector, the investment needs multiply many times over.
"The challenges to urbanisation cover a broad range of issues. How can the infrastructure, ranging from efficient and accessible public transport systems to effective waste management systems in the cities cope with the rapidly growing population? How can cities manage growth in an environmentally sustainable manner without harming the prospects of future generations? How will cities ensure inclusive growth without compromising the rights and entitlements of the economically weaker sections of the population? Can social justice be a cornerstone of the urbanisation process or will polarisation characterise our urban growth story," Ramachandran emphasised.
The urbanisation challenge is also made more daunting by the fact that today the country faces a severe shortage of affordable housing-the National Housing Bank pegs it around 31.1 million, 24.7 million in urban areas and 6.4 million in rural areas. As S Sridhar, CMD, Central Bank of India, also holding additional charge as CMD, National Housing Bank, said recently, housing is a key agent for accelerating financial inclusion and productive housing can be used as a way to generate income for the poor, especially those who work out of home and their income can, in fact be harnessed to repay such housing loans. "This is something that NHB has been experimenting with, but I think this is a model that needs to be perhaps deployed by banks in greater force."
So, what is the way forward? As Ajit Ranade, Chief Economist, Aditya Birla Group, says "the first is a definitional issue. We must first define what is infrastructure development and what sectors does it cover. One simple definition is infrastructure is a public good where everybody gets to consume it without diminishing anybody else's capacity to do so, and a typical example is the air we breathe. Just because one is breathing air, one is not depriving others from doing the same."
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| "Housing is a key agent for accelerating financial inclusion and productive housing can be used as a way to generate income for the poor, especially those that work out of home and their income can, in fact be harnessed to repay such housing loans" .—S Sridhar, Central Bank |
According to him, this definition is important as when it comes to recovering the cost of providing public goods. "Normally, providing public good is the duty of the government and it is only private goods that a citizen must be made to pay for. It is here that the linkages between public-private partnerships come into play, and this is why the PPP model is one of the strongest models for ensuring delivery of services to the public," Ranade adds.
This also raises the question about whose business is it to develop infrastructure? Is it that of the government alone or is it that of the private sector and if it is both, how do these two engage with each other? As S S Tarapore, Distinguished Fellow, Skoch Development Foundation, emphasises, while in the pre-reform period the government provided the maximum amount of resources for funding infrastructure. "This, it did through various policy subventions and measures, involving the Reserve Bank of India and the several development financial institutions, which helped keep the cost of financing down. However, in the post-reforms period, the focus shifted to reducing the fiscal deficit, an unintended result of which was a reduction in infrastructure expenditure, particularly on social sector infrastructure."
Agreeing that availability of long-term finance remains a key issue for boosting core sector investment, Tarapore points to the linkage that commercial sector finance has with the prevailing and projected interest rate structures. "In a well functioning system, the long term interest rate converges to the average of the expected future short term rates, adjusted for risk and uncertainty. The basic prerequisite for this is moderation in medium and long-term inflation and secondly, the development of a vibrant, deep and liquid secondary market. The fiscal bias against debt securities through the taxation system needs to be rectified by an early date. If you do not have a secondary market for debt, you cannot have long-term infrastructure financing being raised through the debt market and that is where it has to come from."
Emphasising on this linkage, Srivatsa Krishna, IAS, points out that "globally, governments are now using what is called a public sector comparator; this essentially tells the government what the approximate cost of a certain infrastructure is if it executes the project and what it is when a private sector developer does it. This is something that the Indian government must put in place if it has to hasten development of infrastructure."
M V Nair discusses the magnitude of the challenge on hand, especially with regard to the banking sector. oday, infrastructure finance is a major challenge before the country considering that the Eleventh Plan envisages about $500 billion investment in this sector. The share of the domestic banking sector in providing credit is on the increase: it has increased substantially from 42 per cent in 2007-08 to 51 per cent in 2008-09 and is expected to touch 60 per cent by 2012. What it means is that Rs 400,000 crore needs to be funded by the domestic banking sector between 2009 and 2010 for infrastructure. This is the magnitude of the challenge on hand and, as a result, there are bound to be areas of concern. But while everybody understands the magnitude and the requirement, what are the areas of concern? The first area of concern for the banks is a maturity mismatch. As of March 2009, only 16 per cent of the deposits have a maturity of over five years. That is about Rs 640,000 crore whereas the loans maturing over five years is Rs 500,000 crore and projected investment is Rs 540,000 crore. This can lead to a liquidity mismatch. This is a challenge that the banking sector has to tackle. Again, people are increasingly favouring smaller maturity periods for deposits while the maturity period for asset creation in infrastructure is on the higher side. The only possible solution is a long-term infrastructure bond. While the financial sector is allowed to issue such bond, the issue of their pricing is an area of major concern. At today level of pricing for such bonds, the interest rate for credit given to finance becomes prohibitive. One way to get out of this logjam will be to pass on certain fiscal benefits to the banks so that they are able to raise long-term resources. Today, there is a growing appreciation of the fact that micro, small and medium enterprises (MSME) play a catalytic role in the development of most economies. In India, the MSME sector contributes almost 45 per cent of the manufactured output and around 40 per cent of the exports. This sector needs a lot of attention because it is the organised sector which gets most of the attention. Since a bulk of this labour force resides in smaller towns and rural areas, its linkages with developing suitable infrastructure again comes to the fore. Even if somebody wants to set up an industry, getting power and other related infrastructure is an issue. Today, banks are drawing up restructuring packages for troubled MSMEs whereby they can avail themselves of ad hoc facilities to tide over temporary funding mismatches, enjoy longer holding period for inventories, convert working capital loans into working capital term loans, and get term loans re-phased. Yet another challenge that the Indian banking sector is today facing is exposure to companies and the groups that are promoting them. Such exposure of banks has almost peaked and prudent banking practices would imply that banks restrict their exposures. A possible solution here is to give a boost to the securitisation market or activate a form of paper financing market. The securitisation of infrastructure loans will enable a bank to bundle its infrastructure loans and sell them to a financial institution at a pre-agreed price. This will free up the bank's balance-sheet and allow it to lend further funds to infrastructure projects. Today, it is precisely such infrastructure the country's banking sector needs if it is to give a push to core sector financing. |
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| "Today, PPP deals are being structured in a way that it is only the capital expenditure being put in by the private party that is of importance, with little mention of how the operating expenditure is to be accounted for." —Nivedan Sahani, Airtel |
"Normally, providing public good is the duty of the government and it is only private goods that a citizen must be made to pay for. It is here that the linkages between public-private partnerships come into play, and this why the PPP model is one of strongest models for ensuring delivery of services to the public" —Ajit Ranade, Aditya Birla Group |
"Today, PPP deals involve multi-tiered issues of convincing the bureaucracy that they are good; convincing the citizens that they are not there to exploit them and convincing the private sector that they stand to profit from them" —Arvind Mayaram, Ministry of Rural Development |
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"Companies entering in long-term service level agreements (SLAs) have to be clear on how they are going to implement new technologies and at what cost or whether they will continue to use existing technologies. There has to be some compliance with uniform standards for such projects to be able to ensure long-term delivery and sustenance."
Krishna only underscored the point that while there is near unanimity
in the country on the advantages of public-private partnerships, there
still remain major constraints for such partnerships to blossom. These
constraints include policy and regulatory constraints; long-term
finance constraints; equity constraints on part of the private
partners; lack of credible PPP deals; and inadequate capacity of the
private sector to execute sufficient PPP projects. Even if clearly
defined projects existed, pricing and risk management, especially
between public and private entities, will need more sophistication and
should move away from a traditional "cheapest supplier" mindset. While
in the short term, this may seem like a great deal for the government,
it has unwittingly introduced unsustainable pricing and risk policies
that may deter future private players from bidding in such projects by
such risk distortion.
Says Arvind Mayaram, Additional Secretary, Ministry of Rural
Development, "there is also the issue of advocacy regarding PPP deals.
This is a multi-tiered problem of (a) convincing the bureaucracy, both
at state and Centre, that public-private partnerships are good; (b)
convincing the citizens that PPPs are not there to exploit them; and,
(c) once the private sector comes in, convincing them that if a project
is well-executed, they stand to profit." The last is especially
important, as private players have often voiced the complaint that "the
deal they entered into was not the deal they were being asked to
execute." Says Mayaram, till the beginning of 2008, in NHAI road
projects, the risk of statutory clearances, which includes land
acquisition, environment clearance and so on, rested with the private
sector. As a result, there were few bidders for such projects.
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| "If you do not have a secondary market for debt, you cannot have long-term infrastructure financing being raised through the debt market." .—S S Tarapore, Skoch Development Foundation |
That PPP projects need some form of standardisation is clear, but what is not clear is that whether such fine-tuning can affect the whole process or not. Thus, Mayaram was clear that in certain sectors it impeded the private parties' involvement, given changing local conditions, demographics and policies, in others, it could ease project implementation and execution. As Nandu Pradhan of Red Hat India, pointed out, technology is always getting obsolete. "This means that companies entering in long-term service level agreements (SLAs) have to be clear on how they are going to implement new technologies and at what cost or whether they will continue to use existing technologies. There has to be some compliance with uniform standards for such projects to be able to ensure long-term delivery and sustenance."
Putting such procedures in place will also mean setting the existing governance structures right. Says Pradhan, "the issue is one of ensuring that we do not just get the technology aspect right but also get the right delivery expertise. As a citizen, I am looking for some healthcare solutions. I am talking about education and infrastructure; and not just technology." In fact, technology and service delivery are being married with the PPP concept in taking governance to the citizens as part of the National E-Governance Programme. Here, the focus is on creating service delivery benchmarks and not just application benchmarks. The advantages that technology brings to such service delivery is that the costs come down drastically even as it imparts a sense of efficiency to service delivery, something that the manual system has been unable to do.
That these are huge challenges is clear from the fact that if we just look at the country's urban sector, the investment needs under the Jawaharlal Nehru National Urban Renewal Mission for the 63 mission are pegged at Rs 335,000 crore in the seven-year programme period. And, if one considers the other urban facilities and the rural sector, the investment needs multiply many times over.
But, even if mindsets shift significantly and suitable standards are developed, the issue that is still to be addressed in a credible way is that will there be sufficient capacity to execute? Today, large engineering and construction companies with mega-project management capabilities in India are fewer in number. The industry lacks not only size but also appropriately trained manpower. As Mayaram points out, "If you look at the bidding, for instance, in the case of projects awarded by the NHAI, in almost 70-80 per cent of them, the top six or seven parties are the same. This shows the kind of spectrum that is available for doing huge/large number of projects through private partnerships in the country."
Reinforcing this point, Nivedan Sahani of Bharti Airtel emphasises that today the bidding process is so structured that "one sees software companies bidding for executing hardware projects. Also, it is clear today many PPP deals are structured in a way that it is only the capital expenditure being put in by the private party that is of importance, with little mention of how the operating expenditure is to be accounted for in the project's timeline. This affects private party interest in such projects."
While it is clear that the only way forward is to step up our investments on core sector, there still remain a number of differences on the way forward. As Ramachandran says “if there is a PPP that takes the development model 'beyond the government what more can be done' then it should be promoted. There are questions like transparency and issues where the partnership is sound, but that is part of the democratic structure that we have and that should not impede our way forward.”
