When Amitabh Kant, the CEO of the Niti Aayog (the Indian government's official think tank), began advocating benchmarking bids, in the allocation of infrastructure projects, with a view to halting aggressive bids, it set off near panic among key players in the infra-structure sector.
Speaking at the inaugural session of CRISIL's India Infrastructure Conclave, Kant said he wants a system where companies that bid aggressively and then don't complete projects, be blacklisted. This he said would actually result in a better role for private investments in creating critical infrastructure.
Kant's comments have set the industry abuzz with questions such as who will decide on the benchmark. Will this act as a deterrent to companies that want to try out new technology and other innovations to cut capital costs and operational costs?
The Narendra Modi regime is seen as a great champion of innovations and the aggressive bids were seen as a big takeaway. In the wind energy and solar energy segments as well as in the allocation of mines, the government had made savings due to a fall in price. Benchmarks set by regulators had flopped miserably. For instance, electricity from wind-based sources were benchmarked for between Rs four and Rs six per unit but when India turned towards bids, similar projects attracted bids of as low as Rs 2.64 per unit.
The idea of discouraging "mindless" bids is already in place. Renewable energy bids come with reduced risks for projects, detailed timelines, and hefty bank guarantees, if the developer fails to meet the timeline or decides to forfeit. The nation has also move to hybrid annuity plans for Public-Private Partnerships on road projects. Private investors will take projects on an engineering procurement construction (EPC) basis; later the special purpose vehicle (SPV) would be transferred to another investor for annuity-based returns that emerge from toll collection.
Issues such as land acquisition, squabbles between departments and ministries, intra-governmental clearances, and unrealistic bids have resulted in several projects being held up from 2008-13. Corporate houses faced bleeding balance sheets and loads of non-performing assets (NPAs). For India to grow at between nine and ten per cent, infra-structure will need to be developed in the manner in which South Korea, Singapore, Taiwan, and Japan have done.
In the past three years, it is the government that has invested in infrastructure development of roads and airports, to compensate for private sector participation. Blacklisting firms with a blemished track record may make perfect sense for India's movement towards the private sector investment cycle, but it seems unfair to blame the private sector alone for past delays. Especially, since India has moved on.
What worries investors today, is that state governments are trying to open up signed agreements, especially in renewable projects. The windy states and the solar states are all trying this. Since most are ruled by either the BJP or other NDA members, the Centre and states will have to put their minds to ensuring that existing agreements remain untouched.
In most projects offered by Indian ministries, steps have already been taken to reduce the risk to the government, placing the onus of performance on investors. Aggressive bids will therefore have to be welcomed to ensure the success of projects like Bharatmala (construction of roads, bridges, and waterways), railways tracks, station development, renewable energy projects, and mine allocation. Setting benchmarks could well simply increase interference.