Opinion: Infrastructure investment imperative

By Avi Dutt India is now at a crucial stage where infrastructure investment will play a vital role in sustaining economic growth. However, land acquisition, aggressive bidding and non-performing assets are key challenges to infrastructure PPPs (public-private partnerships). Further, India is dealing with a high level of stressed assets, and there is a need to […]

By Avi Dutt

India is now at a crucial stage where infrastructure investment will play a vital role in sustaining economic growth. However, land acquisition, aggressive bidding and non-performing assets are key challenges to infrastructure PPPs (public-private partnerships). Further, India is dealing with a high level of stressed assets, and there is a need to restore credit growth for public sector banks as fundamental to the future growth of the economy. Stressed assets in banks combined with little bank capital could lead to additional and potentially crippling losses on these assets.

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Also, the lack of stability of credit interest rates poses a significant risk for investments in the sector. The fact that infrastructure investments in India are generally based on the expected return on USD and not on user charges creates an imbalance and affects the total inflow of foreign infrastructure investments in the country.

There is potential for India to take advantage of the network effect created with a large pool of investments available across multiple facets of investors in the infrastructure financing sector. Domestic sources such as India Pension Funds which have been lying dormant could give a big boost to the sector if utilised efficiently.

India should learn from practices in Canada, the Netherlands, Australia and the likes on efficient usage of domestic funds to push infrastructure development. Policymakers should also keep in mind the learnings from debates from the West on building wholesale large-scale infrastructure v/s retail-based customer utility infrastructure and customise a development plan based on the needs of the country.

The Aadhaar initiative and digitisation of the GST Net are the few innovative concepts that India can export today. Linkage of technologies such as Aadhaar, ULIP, GST, and the Internet to map available infrastructure in the country and identify the gaps can help leapfrog the growth. Unified Logistics Interface Platform (ULIP) is designed to enhance efficiency and reduce the cost of logistics in India by creating a transparent, one-window platform that can provide real-time information to all stakeholders.

Main Issues (PM Gati Shakti’s focus) 

Ensuring consistency in policy and regulatory framework 

• There is a need for a better regulatory environment and consistency in the tendering process — government should base tendering process across sectors (eg, in the case of IT, 70% focus is on technology and 30% on financing)
• There is scope for cross-learning about tendering process. For eg, the QCBS (Quality cum Cost-Based Selection) approach can be looked at for tendering. It is not done across all ports, railways, etc.
• Expedition of contractual sanctity should be of prime importance and lack of consistency and policy coherence across different government departments should be addressed as a priority.
• Between the government and the Reserve Bank of India, there needs to be a holistic way to deal with the issue of stressed assets. A dedicated policy needs to be formed across sectors for non-performing assets; revamp of PSUs.
• There is a need to build flexibility in the system for future contingencies/unforeseen circumstances.

Enhancing enforceability of project contracts 

• An equitable sharing of risks is key to the success of any PPP project. The first step is to define the kind of projects and the interpretation of risks in each of the projects
• Should have strong and creditworthy counterparties, and international arbitration (especially for projects with international investors) clauses included in all PPP contracts.
• Bringing in an independent regulator or international arbitration with enforceability will shorten the timeframe of dispute resolution. Major ports can do this now through Sarod – Dispute Resolution Mechanism, but the execution is more important.
• Further, the government needs to expedite the passage of the Prevention of Corruption Act to empower bureaucrats to decide commercial importance without the fear of being penalised. In the long run, the Indian Penal Code must be reformed.
• The Centre can work on creating a model contract that defines the risk distribution upfront, allows for counterparty cushion and includes the arbitration clause. Best practices from other countries where PPP projects have been successful can be incorporated.

Driving predictability in execution  

• A structured framework for dispute resolution mechanisms in contracts will allow quicker resolution of disputes through arbitration of international standards. This further helps maintain sanctity, interpretation, and strengthening of contracts.
• Indian market is now ripe for involving global institutions in the skill development of vendors. There can be merit in avoiding L1 bidding by focusing on technical capability.
• For the long run, the Centre has the potential to pursue initiatives related to innovation in investment structures, creation of a more transparent and predictable regulatory environment, establishment of better governance arrangements to enable stronger PPPs, and adoption of effective risk mitigation and management mechanisms. Convening the right stakeholders to progress on these topics is very important.
• Focus on skill development by holding roundtable meetings of the right stakeholders.

Improving communication and collaboration between the Centre and States on execution, policy and transparency

• There is a pressing need for better oversight of PPP projects in India — both ongoing and upcoming.
• Bureaucracy should be better skilled in designing and regulating PPP projects. There is merit in creating a regulator wing inside the IAS academy that skills young bureaucrats.
• Better contracts and dispute resolution mechanisms are required to expedite infrastructure investments.