Govindraj: Mr. Munjee, thank you very much for speaking with us. You are one of the original architects of the approach to solving infrastructure problems with structured funding and creating post-liberalisation framework for fixing the infrastructure bottleneck. Many years have passed and we are all staring at this abyss i.e. lack of infrastructure. So where do we begin and what can we fix?
Nasser: Let me start by saying that when we started IDFC, 99% of infrastructure was in public domain. It was all publicly managed, publicly executed, publicly invested – telecom, railways, you name it. Our task was to get it out of the public domain and bring private sector participation. In that sense, IDFC did exactly that.
We were the first promoters of the whole concept of public-private partnerships (PPPs). And I think in those early days, we actually set the scene for privatisation, for civil aviation reforms, for power distribution, power generation, and telecom on a revenue share model… so all of that early work was done by us. And I think it’s held India in good stead because it’s those initiatives that are bearing fruit. It’s given us the new airports today; the ports that we have today. It’s given us private power distribution companies. So, in a sense, it was quite pioneering.
In a sense, in India, infrastructure can be dropped in 3 boxes. One is, you sell the asset, you privatize. That’s the hard one in India. People don’t want to sell the family silver. So we couldn’t really make much of a dent in privatization. Second is commercialization where you sweat the asset. You don’t actually sell the asset but you get the Government to hand over the asset to be better managed. And this is Build-Operate-Transfer (BOT) and all of that. This is where I think we were more successful in pushing the agenda. And the last box is output-based contracts, which came to be known as the annuity financing model. This was very controversial when I pushed it but now it’s regarded as normal. What we’ve seen is huge progress in infrastructure in those 6-7 years because we moved into a very different domain and we got the private sector involved.
Now, when I look back after so many years, and I ask, “What has gone wrong?” I think there are two or three things that I’d like to mention. The first thing is the monetary policy in India – 2010 onwards, it has gone in exactly the opposite direction from what we should have had. Today, we have very high interest rates.
Govindraj: You are speaking as a borrower?
Nasser: No. When you have to finance infrastructure and you want the private sector in, you are going to have financial arrangements which makes sense. Today they don’t make any sense. You need IRRs (Internal rate of return) of 22-25% in infrastructure. BBB rated companies can’t borrow for less than 15% or 14%. It’s not going to happen. So that is the biggest constraint in infrastructure. Second, a lot of companies have begun operations- like GMRs, GVKs, and Lancos- all of them are over-leveraged. They were so excited that they just grew dramatically and over-leveraged. They cannot anticipate the monetary environment we are facing: tight liquidity and very high interest rates. As a result, they have gotten into trouble and they need to deal with leverage. So, a lot of infrastructure assets are for sale today. There are people who have walked out, you know walked away from projects. So that’s a major issue.
The third thing I’d like to say is that we need to promote the PPP model. I look back and there are two problems. The first is: PPPs to actually work, it needs very strong public institutions. We don’t have those public institutions. We need someone to hold up the Government-side of things. And that does not exist.
We have the institutions but they are not properly structured. You can say Hudco is a good public institution for housing. IIFSL is a very good institution for infrastructure. But they haven’t actually played the role that they should have. So this is an Institutional problem.
Govindraj: Is it also that they haven’t managed to give it that gravitas.
Nasser: Yes. To give it the sort of framework to protect public sector interest and discipline the private sector… this is the first problem that we have to strengthen, the public Institutions that operate infrastructure. The second problem is that the last “P’ in “PPP” never happened. So, we never saw “Partnerships”. We just saw public-private contracting. And where that contracting was with the public sector, you had very one-sided agreements.
For example: GAIL India would have gas agreements which said that we will give gas if we had it and if we don’t, tough luck. You can’t run things like that… you have seen the pricing models set in power all coming to the fore now. As a result of which not only the private sector operators are restructuring now, they are in deep trouble… we need to restructure the sort of agreements we sign at that time. For example: fix prices on power, suddenly the energy costs went through the roof and everybody is caught in the middle.
Govindraj: For which the Government does not seem to be in the mood.
Nasser: Exactly. So, everything is stuck. It’s become a logjam. The other area is institutional reform itself. For example: In the old days, the economy was a Soviet economy, a centrally planned economy. In the old days, the commanding heights of the economy were supposed to be controlled by the Government. Hence, we created ministries for every activity. Today, we have 12 ministries that impinge on Infrastructure. Everything is separate. Civil Aviation is separate, Shipping is separate, Power is separate, Railways is separate, Telecom is separate and Ports is separate. You cannot have integrated infrastructure development with 12 different ministries. The structure is wrong.
I have been arguing very, very vociferously, to no avail of course, that we need an Infrastructure Commission. A permanent Infrastructure Commission. And we need to get rid of some of these ministries. You need to combine and we could have one energy ministry, one telecommunications and one transport ministry. Bring it down to three and all the three come under the Infrastructure Commission, which would then drive an integrated approach to infrastructure. What we need is “Sequencing” and “Integration”.
For example: You build a port because the draft is good but nobody looks at connectivity. It is very crazy to say that ports were built and the connectivity didn’t come for 5-6 years. And you cannot have a port when the evacuation doesn’t exist through railways and roads. Only now are we seeing some progress of that. So we need to integrate. 70% of our container traffic on ports is actually transhipped out of Sri Lanka and that’s been the case over the last 10 years and we have not made a dent on that. We’ve got to now pull up our socks. Actually, look at the structural constraints that exist, the financial constraints that exist as well as the Institutional constraints that exist.
Govindraj: How are things on the demand side? I mean, a lot of this was looking particularly acute because we were growing furiously and so on which we are not right now.
Nasser: On the demand side, any economy to grow is going to require Infrastructure. This idea that you don’t need regulation and you just need free markets to solve the problem has been proved to be absolutely erroneous. You need regulation. You need Government, Government intervention but you don’t need them to operate things. They need to set frameworks. Even the regulatory structure that India has is thoroughly erroneous in a sense that we are very influenced by Sovietism.
You know, we have these 9-12 ministries. Why do we need a central regulator? Every state has a regulator. Regulators are staffed by bureaucrats. And regulation is a very complex business. You need economists, you need projections, you need a lot data, and you need a lot of data analytics. And this is not easy work. So, in a sense, if I were in a position/power, I would say, I’d have one energy regulator and one telecommunication regulator.
Govindraj: So If I were to come to the present, you know there a lot of projects in roads and ports which are going abegging .They’ve been put up for bids and no one is turning up. And this is almost is an immediate problem and cannot be resolved by the creation of a Commission or a Regulatory Commission to manage regulation or oversee Public, Private partnerships and so on. Those will take time. What is the solution for the next 6 months to a year?
Nasser: I am afraid there is no quick fix. Today everything is working against Infrastructure. The structures are working against it. Sectoral policies are working against it. We have regulations which will kill civil aviation; the cost of running an airline is going up dramatically. Airport charges are going up by 140-150% overnight. Now, how can cost be sorted out? This could be sequenced somewhere. So, we’ve seen the mess we have with telecom policy, power policy, energy policy. We have seen problems in each of these areas. Not only is some macro economy negative, sectoral policies are also negative. And the more ministries we have and more attitudes in terms of how those sectoral policies are going to be set, you create problems.
The world is a different place. There are problems right across the world. Private companies are de-risking. They will not take risks that are unmanageable. I think India has come to a point where those risks are unmanageable and unknown – nobody is in charge… who do you appeal to? They’ve seen 2G.You’ve to see the cold linkages problem. You’ve seen the energy, seen the regulators and how they operate. Look at the IRDA for example in Insurance.
Govindraj: What about IRDA in insurance?
Nasser: Well I don’t want to go into those details. I used to be on the board of an insurance company. Getting products approved through IRDA, getting things done through IRDA was a challenge. So, you know, I think, regulation is about protecting customers, protecting the way markets function. It is not about day-to-day management. It is all a Soviet planning system where you get into micro-management of enterprises…unfortunately, we haven’t learnt that we need a mind-set change away from central planning, of central control.
Govindraj: This still prevails?
Nasser: Yes, very much. I always maintained the Soviet state is alive and well in India and has always been. And my metaphor for this is rubber stamps. You know, from the airport, when you start and when you leave, you’d be having 10 rubber stamps on your boarding pass. This has to go. This is a metaphor of checks and balances that are put into the system in a very inappropriate way. No country does this anymore. And you ask yourself why are you doing this? We’ve got to simplify. We‘ve got to make clear, transparent regulations. We have to have an outcome-based policy and we want to see those outcomes. And we want to see those outcomes and things are getting out of the way of those outcomes.
Govindraj: Last question as we are running out of time. What is the bright side, if any?
Nasser: Well, the bright side is there is a huge potential for investment, for improvement. We are talking about 1 trillion dollars in network infrastructure. But we need another 1 trillion dollars in investment in our cities for urban infrastructure. All of this is for growth. Because the more infrastructure investment happens, that itself generates demand in the economy… It’s waiting to happen… and all it needs is somebody to sit down and say “let’s do it, let’s get rid of these constraints.” These constraints are man-made and they can actually be done away with in a matter of months. I don’t think why it takes years to change the way things function. India has a phenomenal opportunity. I would think that if we had the sort of right policies, today we would be growing at 8% instead of 4% that we are. It’s entirely policy constraint.
Govindraj: Right, and we hopefully come back in good times. Thanks for speaking with us.
Nasser: Thank you very much.