Govindraj: India, as we all know, faces a massive infrastructure deficit. Lots of people are breaking their heads on this one, and one of them is Vinayak Chatterjee, chairman of Feedback Ventures, who joins me now to discuss the issue. Vinayak, thank you very much for joining us.
Vinayak: I’ll have to, at the very beginning of the programme, correct you. We changed our name since we wanted a very relevant name, and it is Feedback Infra.
Govindraj: Let’s take this from outside-to-inside view rather than inside-to-inside view. What is the state of Indian infrastructure?
Vinayak: There are two broad baskets in which I could park and answer that question. The first basket addresses the sector in totality, which is public sector and private sector. And what I call logjam in public policy and implementation….to have a framework of policies that makes the sector move – whether it is coal pricing or gas pricing or whatever. That is bucket number one.
Bucket number two is public private partnership (PPP)… with the last P (partnership) having almost evaporated. The Government does not trust the private sector to do the right things and the private sector does not consider Government as a true partner…
Govindraj: Is that a current problem or has it been there?
Vinayak: It has become a current problem… we have been through a honeymoon phase, let’s say, when many of India’s largest corporate and emerging entrepreneurs bid for road projects and airport projects and power plants. We saw a very strong honeymoon period… or if you may call it, a post marriage euphoria… but somewhere, the relationship has hit rocky shores.
Govindraj: We have seen people pulling out of road projects and things like that…
Vinayak: We have seen people pulling out, and more importantly, which is a little more scary, is that you are now seeing a reluctance of the private sector to even consider bidding for fresh projects.
Govindraj: So, what does that mean? When you come to India for the first time, let’s say as many investors do, you always wonder, you know there is an infrastructure deficit… but like most emerging markets, someone must be thinking about it and getting things right… maybe things are slow, and it will eventually sort itself out.
Govindraj: Is that happening?
Vinayak: By the time you pose a problem to the time the Government really recognises it’s a serious problem, is a long time gap. I wrote my first article in Business Standard with a bold headline called DPLS – Decision Paralysis Lead Slowdown, and a lot of friends in Government called up and said you are a very negative kind of guy… I said you watch, because infrastructure sector feels it first, FMCG feels it the last. We know when our order book dries up and projects stop moving ahead.
The Economic Times, in a lead editorial two weeks back, titled “2009-2012, the lost years”, explained why they were lost years because somewhere, the entire political machinery went into some kind of self-satisfied slumber that everything was alright and the whole issue of logjams – whether it is forest and environment, weather it is policy for coal pricing or whether it is getting Coal India to move or whether it’s getting Railways to move faster….if you analyse it, it had a bunch of policies that effectively chained the movement in these sectors…
Govindraj: Right… so, one is because we were intoxicated by growth, second is we felt or the Government felt the private sector had it too good, and may be now things needed to be done differently.
Vinayak: I don’t think the Government felt that the private sector was too good. It was just that the Government bandwidth went into focussing on removing the logjams, which it is doing today. For example, the simple way to answer your question, you set up a cabinet committee for investments, right? Now, that is a very strong reaction… couldn’t it have been done in 2010? The point I am making is that actions that were required in 2008, 2009 and 2010 are happening today. So, we have 4 lost years… it is, as somebody joked to me, like tickling a hippopotamus, it laughs after 3 months… I mean, when we were tickling the Government, it started laughing or crying, in this case, after 4 years.
Govindraj: So does that take care of both the buckets that you were talking about.
Vinayak: Well it takes care of the bucket that is moving existing projects forward including projects as far back as the 1999 licences for oil exploration, what is called the NELP… those were issued in 1999 but could not be implemented till February 2013 till the Cabinet Committee on Investment (CCI) got into the act… Now, couldn’t it have been done 4-5 years earlier? Removing the logjams of that kind of stuff is happening now. But institutions that are required to get the confidence back in this concept called PPP is not happening yet.
We from the private sector asked for many things… I will tell you the top three: the first, we said the Government should not bid out any projects for which sovereign permissions have not been cleared. Two, we asked for a National Infrastructure PPP Renegotiation Commission, and finally we asked for a new law, which the Prime Minister and Montek Ahluwalia, Deputy Chairman of Planning Commission, also agreed to… we wanted a completely different legal architecture to make infrastructure regulators completely independent and empowered to do their jobs.
Govindraj: Are there similar structures in other countries?
Vinayak: Well, let me take the first one first… the biggest problem today is the lack of faith in the Government that in a 30-year contract or a 60-year contract, black swan events can happen any time which no legal contract can, in a sense, predict. So, lawyers call PPP contracts judicially incomplete contracts because such contracts do not have the power to encapsulate in the contractual understanding or the infinite number of possibilities of what could happen in 60 years or 30 years.
The country directory of World Bank, in a sense, substantiated this…out a survey of 1,000 PPP projects in Latin America across 15 years, they have to come to the startling conclusion that 50% of the PPP contracts come up for renegotiations in the first 4 years of their life. So, that tells you the problem with the airport-metro line, it tells you the problem with Tata Power, Adani-Mundra, it tells you the problem with GMR on Udaipur-Kishangar… it gives you contextual framework to say that guys, listen, forget those old days of bureaucracy which says that if you have signed a contract, it is cast in stone. This is a partnership, and it’s a partnership about moving a public utility across 30-60 years when a series of black swan events could possibly hit you… therefore, you need to reset and renegotiate the contracts in public interest but we do not have an institutional mechanism to do that.
Govindraj: Correct and I agree that there could be need for that but that also makes the system of Government and bureaucracy more suspicious of the private sector even if you were not to quote the Latin American studies…
Vinayak: Broadly, it makes private sector equally suspicious of the Government that if the Government has bid out the projects, let’s say the airport-metro line… the entire project is based on 40,000 footfalls and you end up at 16,000… there are two things you can do. You can say that, well, you bid with your eyes open, now you will live for the next 30 years and keep accumulating losses… or you say, it’s a partnership, I think we both got our traffic predictions wrong, let’s recognise that and re-fix the contract to see how we can make it meaningful for you and sensible for the rest of the public and make it as transparent as possible… as is being down now.
For example, in Tata Power and Mundra projects, they have taken the conceptual position that protecting the investment is as important as protecting the public, and has asked Deepak Parekh to give a dispensation on what is called compensatory tariff. So, we are moving in that direction but the question is, it is ad-hoc… the Government does not have an institutional mechanism, and you get tangled in civil courts at the state level and the central level.. we are saying create a quasi-judicial body for the national infrastructure PPP Renegotiation Commission, and let the confidence come back.
Govindraj: So that will ensure that many of the projects that are now stuck or slowing down will get revived …
Vinayak: The private sector, domestic and international, will have the confidence to bid for new projects. Today, you got no bid for trans-harbour link, there are 4 major port bids in Chennai and other places, and they have not got any bids…
Govindraj: Therefore, that also sort of presumes that it is really the Government, rather the Government alone cannot do this, we need active PPPs whichever way we figure it out. So, that is a sort of active presumption. Let’s come to the other part now… you said there were these lost years, we are finally beginning to show some movements… CCI has begun passing orders, which means things are coming back on track. What is your outlook if some of these things begin to stir or have begun to stir, may be some of the regulatory commission for PPP will come into place… when should we really start seeing more positive moves?
Vinayak: I think we have, in a sense, we are not going to go down further.We have the infrastructure mode and market conditions have bottomed out. It’s a slow climb up from the deep hole that we all put ourselves into.This is all predictive.
In terms of some of the statistics that I am dealing with, I’m looking forward to what I can broadly call a public expenditure-driven, construction industry-led revival.Why am I saying this? From November onwards, when Chidambaram came back to the finance ministry, and in February when the first meeting with the CCI happened, there’s been a lot of push to get public expenditure going… and to move them fast, you have close to Rs 90,000 crore worth of contracts coming out of the two dedicated corridors. You have 8,000 kms, hopefully, of EPC contracts coming out from NHAI. You have a clutch of urban metro rail projects, irrigation projects, airports etc. So, the push right now is, for the foreseeable short term, public expenditure-driven, cash flows, order books coming, where private sector can take those catches.
Govindraj: It is Keynesian….
Vinayak: Yes. It is completely Keynesian. In some sense, private sector has to gear up once again. It would be good news to the construction companies. It would also be good news for people who are suppliers of goods and services to construction-driven infra projects. For example: these construction projects are also happening in the electricity sector; some stalled power projects are coming back, transmission lines have been built, distribution sub-stations are being built. If you are supplying cables, switch gears, wires. you are making road-rollers; companies in the business of providing goods and services to construction companies and projects will see a revival. That is Stage 1.
Stage 2, which I think is about 2-3 years away, is to refix the institutions that can build confidence in PPP. This doesn’t come easily. I feel that real action will start only after the next general election. So PPP is going to languish for another 2 years…
Private sector players should be gearing up for a public expenditure-driven, construction-lead revival… and two years from now, we should be ready again with fresh PPP projects and confidence coming back… and very importantly a new set of players and builders.
Many of the players and bidders you saw may just fade away into the horizon. We are already noticing a trend where a large portion of the financial community is coming upfront to bid whereas earlier it used to be the construction-developer companies that bid for PPP projects. We are seeing companies like IDFC, we are seeing P-funds coming upfront and bidding… that changes the composition of the entrepreneurial crowd, the developing crowd. This is generation two coming after the first generation..
Govindraj: That explains many of the Hyderabad companies.
Vinayak: I wouldn’t be specific. There are in every wave of opening up of such markets. If you look back at civil aviation, for example, you think of names like East-West, Modiluft, Damania, NEPC and Paramount. You will realise it is not just in India… when a market that has hitherto closed or unexplored, like the American railroads, for example, or the first batch of how did the Rockefellers make their money; the first batch of oil trading and pipelines. When they open up, you get a first flash of very dynamic, very entrepreneurial, very energetic developers. But they come with their own baggage of over-eagerness and many of them fall by the wayside… and then you get the second generation of more sober, long-term stable investors who see the full picture and then take cautious, sober investment decisions. In Indian Infrastructure, that PPP wave, I predict, will start 2 years from now.
Govindraj: That is very positive to end on. Thank you so much for speaking with us.