Getting infra on track

PPP at a decadal low augurs poorly for its future

Though the government is doing its best to step up infrastructure investment through the budget since private investment has all but ground to a halt, this is not going to be anywhere near enough. A recent World Bank study on private participation in infrastructure (PPI) shows this is down from a high of $73.7 billion in 2010 to a mere $4.2 billion in 2015 and, within this, the share of PPP is down from $48.4 billion to $4.1 billion. The decline is across all sectors, but perhaps the sharpest is in areas like electricity where PPI fell from $37.8 billion to $2.1 billion—within this, PPP fell from $33 billion to $2.1 billion. Ports, where all the PPI took place through the PPP route, fell from $1.4 billion in 2009 to a mere $0.1 billion in 2015. Roads fell from $21.9 billion in 2012 to $1.9 billion in 2015—in this case too, all PPI took place via the PPP route.

Much of the fall is understandable, not just from the point of the overall economy slowing from over 9% to around 5% (going by the old data series, and 7% if you go by the new one) but also due to the fact that most of the infrastructure heavyweights—especially the ones like the GMR and GVK groups that built most of the new airports—are in deep financial stress. Many infrastructure fir ms do not even have enough of an ebit to cover interest payments—that is, their interest cover is less than one. Since it will take several years for this to get fixed—it is not clear that a mere pickup in economic growth will be enough to rescue these firms without some very deep surgery—the government’s only hope is to step up investment to the extent it can and to, as it has in the roads sector, come up with hybrid equity models where the bulk of the risk is taken by the gover nment.

Over the medium term, however, it needs to work on measures to address the reason why so many infrastructure firms are in trouble today. The Kelkar committee on this has some useful suggestions that need to be rolled out. There are simple solutions like not tendering a project unless at least 80% of the land required for it has been acquired by the gover nment. More importantly, as Kelkar says, since the projects are typically of a 20-30 year time-frame, it is important to course-correct periodically since there is a big possibility of the project not tur ning out the way the promoters had originally envisaged— in the case of the Tata and Adani power projects, for instance, the change in Indonesian law played havoc with the projects’ financials. Similarly, a change in economic activity over decades can completely change the economics of a road project, for better or worse. Kelkar calls this the ‘obsolescing bargain’ that needs to be addressed by regular resets perhaps—the new telecom policy in 1999 is the most successful example of such a reset. Having sector regulators is another way to deal with the issue, and allowing fir ms to exit is a critical component of getting PPI/PPP back on track. Even where regulation through contract is preferred, the contracts need to have enough flexibility to deal with unexpected ups and downs, to ensure that neither the private firms nor the government get short-changed.