The earlier envisaged target of $1 trillion investment in infrastructure during the 12th Five-Year Plan (2012-17) seems difficult to achieve, but not impossible. However, the economic slowdown in the last couple of years, and the high current account and fiscal deficits, have severely constrained the government's ability to undertake fresh investment in infrastructure. Realising its own limitations, the government has been making an effort to get more private investment in infrastructure.
Although the share of the private sector in infrastructure investment has steadily risen over the years, sustaining private sector interest is becoming more and more challenging, especially after 2013, which was a particularly bad year for the infrastructure sector. Sectors such as roads and power have suffered the most. In the roads sector, delays in project clearances, unrealistic bids and a host of other factors have emerged as serious impediments. BOT (build-operate-transfer) projects are the worst affected. Progress on national highway stretches awarded under BOT has almost got stalled.
In power, generation capacity continues to grow, but the availability of coal is emerging as a serious challenge. Coal accounts for almost 60 per cent of power production in India, but domestic coal production is way below potential, due to sub-optimal technology for prospecting and excavation. This increases our reliance on expensive coal imports. To compound the problems of the infrastructure sector, the new Land Act would result in almost no land being available for private-sector projects and even public-private partnerships. This is bound to drive up costs and make the business of infrastructure creation even more difficult.
India's continuous reliance on monetary tools to rein in inflation has also led to higher interest rates, which has driven up costs, making many projects unviable. Delays in getting environmental clearances remain another stumbling block.
The combined impact of all these is felt by the commercial banking sector (especially public-sector banks), which has the maximum exposure to infrastructure sector. While the asset-liability mismatch has been a perennial problem for it, the present difficult economic conditions have led to a sharp rise in non-performing assets (NPAs) and restructured loans. This is severely constraining their lending capacity for future projects. With front-loaded loan repayment, concessionaires face problems making the payments, because revenue from the projects typically grows as the concession matures. Thus, servicing the loan in the initial years is a major challenge. When an infrastructure loan gets restructured/refinanced, the intent is to match cash-flow with repayment. As per Basel-III regulations, an infrastructure project is considered an NPA only when its future cash flows cannot match the repayment schedule. Thus, when the cash flow problem is addressed through restructuring/refinance, then ideally, the asset should not be classified as an NPA.
India needs specialised financial institutions equipped with infrastructure project appraisal skills, and these institutions should be incentivised to indulge in take-out financing and refinancing, so that they can take over banks' exposure in infrastructure projects after the initial phase of lending (during the construction period) and thus relieve banks to lend to other projects.
Part of long-term domestic resources such as pension and insurance funds needs to be channelled into infrastructure financing. So far, insurance and PF agencies are allowed to invest in mutual funds. If the government allows them to invest in non-banking finance companies (NBFCs) such as infrastructure and asset finance organisations, that would go a long way in addressing the asset-liability mismatch problem for NBFCs.
It is imperative to design long-tenure financial instruments with attractive returns so that domestic savings can be channelled into infrastructure creation instead of being invested in unproductive assets like gold. Inflation-linked bonds need to be tried out as well. Ideally, any financial institution with public financial institution (PFI) status should be allowed to mobilise resources by using these instruments.
Recently, the Reserve Bank of India (RBI) permitted such resident entities/companies in India, authorised by the government, to issue tax-free, secured, redeemable, non-convertible bonds in rupees to persons resident outside India, to use such borrowed funds for on lending/re-lending to the infrastructure sector and for keeping in fixed deposits with banks in India pending utilisation by them for permissible end-uses. This implies that eligible entities will be only companies controlled and owned by the government of India, such as the Power Finance Corporation, Rural Electrification Corporation, and National Housing Bank. Ideally, the government should expand the list of such eligible entities beyond public-sector undertakings and include PFIs also, for issuing overseas bonds.
Our policies often tend to encourage mega infrastructure projects, the underlying logic being that economies of scale will lead to cost advantages. But often, achieving financial closure for such mega projects, or getting necessary clearances for them, becomes immensely problematic. As it is, with so many variables across the value-chain, undertaking any infrastructure project is complex. Optimum-sized projects are easier to implement and manage, and their financial closure can be achieved faster. In infrastructure, even 'small' is big enough. Thus, the ideal way forward would be to break up each big project into parcels of optimum size and then execute them. This approach would revive the interest of concessionaires and developers in BOT projects.
The time has come for the Centre to allow state governments to shape policies that suit their needs, especially in the case of infrastructure projects. The Centre can provide a wide framework as guidance, and based on that, the states should evolve their own policies pertaining to land or environment or anything else. State governments are best suited to strike the balance between growth and development. Thus, irrespective of who is in power at the Centre, we need a change in the mindset and start experimenting with fresh approaches. We need to have more practitioners from the infrastructure domain as policymakers, than theoreticians. To get the infrastructure train chugging along in our country is not difficult, but definitive simple steps need to be taken. Without building up our infrastructure rapidly, our country, with huge potential, will remain a laggard in the global arena.
(Hemant Kanoria is Chairman & Managing Director, Srei Infrastructure Finance Ltd)