‘Month-on-month revenue since October better than FY20’

SHAILESH PATHAK, chief executive officer (CEO) of L&T Infrastructure Development Projects (L&T IDPL), has — since his early days as an IAS officer — written extensively on the need for the government to build projects and for the private sector to run them in order to get India’s infra built. In an interview to Subhomoy Bhattacharjee, he speaks about proposals in the FY22 Budget, which brought several of those on board. Edited excerpts:

How differently has the year 2020-21 turned out for the infra sector companies such as yours?

Obviously, March-august 2020 was a very uncertain period in the pandemic lockdown. However, since September 2020 with gradual unlocking of the Indian economy, there has been an appreciable bounce-back. Indeed, by December 2020 most companies were roughly at the same levels as in December 2019. After a very difficult Q1 we have seen a substantial recovery in Q3 from October onwards.

This improvement would continue in Q4 January-march 2021. While some consumer-facing industries like hotels and tourism may have continuing impact, in the infrastructure sector normal operations have resumed across all four stages.

The good news is that since October 2020, revenues for FY2021 month-onmonth are much better compared to FY2020.

A major argument finance minister Nirmala Sitharaman has made in her Budget speech was the government should build infra assets and then privatise those--brownfield investments. How do you assess this policy?

I have been advocating exactly such a policy for over a decade. In 2010, I had written a brief note on recalibrating PPPS which was later published as a working paper in a Stanford University global projects center.

Various publications since then including The Economist have quoted me and pushed the argument that the state should only build things. It should then sell the right to operate completed, and thus lower-risk projects to the private sector, raising funds to pay for more construction.

So I am delighted that India is taking the right steps now. While several wistful enthusiasts kept asking for a return to PPP in construction circa 2010, India is a very different country now. There is clear merit in government taking early-stage construction risk, and once cash flows start, giving out brownfield assets on PPP. I call these caterpillars turning into butterflies. By now, there is sufficient evidence that private investment including global dollars is far easier to attract in the butterfly stage. In May 2018, our company sponsored the first privately placed INVIT in India, attracting marquee global investors.

This in turn has led to several other Invits being launched since then.

This means the National Infrastructure Pipeline (NIP) should be entirely dependent on brownfield asset monetisation

There are at least six ways of financing NIP for construction. The first and most substantial is budgetary outlays, as provided in the Union budget, or in state government and municipal budgets. Budgetary capital expenditure outlays are dependent on revenue buoyancy and tax efficiency; the more the formalisation and growth of India’s economy and our states and cities, the higher would be such budget outlays. The second is asset monetisation and recycling, at every level of government.

Thirdly, government borrowings against future tax receipts, or innovative mechanisms such as land value capture, betterment levies, or Kisan Stock Option programmes. Fourth is domestic and international borrowings, both from commercial markets and from multi-laterals. Fifth is user charges, such as toll payments for highway use, that generate revenues for future construction and leveraging such cash flows for further debt, by entities such as NHAI. Finally, there is the alternative of PPP projects, which may succeed in short-gestation projects such as in solar energy farms.

Regulatory issues have often challenged infra projects. Of late, has our experience improved in handling regulatory issues?

Given that over 70% of India’s construction would happen in the next two decades, it is time for a special ‘Construction Law’ adopting global FIDIC contracts and dispute resolution practices. Regulatory issues at national levels are easier to resolve. More troubling than regulatory matters are problems around the design phase, adequate budgeting and at project preparation stages. It is essential to spend time during the design phase and set out exact outputs on ‘what to do’ instead of too many ‘change of scope’ items during construction.

Similarly, project preparation and budgets should be realistic, not vulnerable to time and cost over-runs. For large projects, lump-sum turnkey contracts like EPC are better than item-rate and piece-rate contracts. Above all, the various approvals and right-of-way essential even before the shovel hits the ground are issues that delay infra projects. Quick decisions by government authorities during construction would be most welcome now that engagement with the private sector shall be more intense in most sectors.