The Hindu Business Line : `India needs to take GCFI as seriously as GDP' — Mr Vinayak Chatterjee, Chairman, Feedback Ventures Pvt Ltd.

The country needs to invest at least 7 per cent of its GDP in infrastructure, which at current levels works out to Rs 200,000 crore a year. It is clearly not investing enough in infrastructure but, sadder still, says Mr Vinayak Chatterjee, Chairman, Feedback Ventures Pvt Ltd, an integrated infrastructure development company, nobody talks about Gross Capital Formation in Infrastructure (GCFI) when looking at economic indices and economic performance.

"Whenever we talk of the economy, we must include GCFI over and above GDP, fiscal and revenue deficits, forex reserves, exchange rate and inflation," says Mr Chatterjee, who is also the chairman of the Confederation of Indian Industry's national committee on infrastructure. A graduate in economics and an MBA from the Indian Institute of Management, Ahmedabad, Mr Chatterjee co-founded the Feedback Ventures group in 1990. In this interview, he speaks about the issues pertaining to infrastructure in the country.

Excerpts from the interview:

Can you give an update on what is happening in the infrastructure sector?

Let me first outline some of the macro issues. The biggest constraints to GDP growth are agriculture and the logjam in infrastructure. The lack of growth in agriculture is also because of almost three decades of neglect of rural infrastructure — irrigation, connectivity and roads.

All problems relating to economic growth and quality of life are attributed to the lack of infrastructure development. The nation should have an annual budget on how much it wants to invest in infrastructure. In pure economics terms, it is called GCFI — Gross Capital Formation in Infrastructure.

The broad economic norm is that a country coming out of poverty and at that particular point in the developmental curve, should put 7-10 per cent of its GDP in infrastructure, which at current prices is a little over Rs 200,000 crore a year. An infrastructure project takes three to four years to develop, which means you need a pipeline of projects for at least Rs 800,000 crore.

The unfortunate part is that no one talks about the GCFI — what is the annual target for that. Infrastructure is about creating capital stock; it is not about production or GDP. Any good businessman will have a capital budget for his company; as a householder, you will have a capital budget. Doesn't the same apply to the country? Here, I am talking only about capital budget in the infrastructure arena.

The sad point is that we do not seem to have these statistics. Even if we do, it is not culled out and presented. Even if that is done, it is not part of any budgetary process. How can we run the country this way? What is the point talking about decaying infrastructure without this first step? The country needs the GCFI to be taken as seriously as GDP figures.

After the UPA came to power, there was a lull in the national highway projects. What was the issue? Was it one of continuity of programmes?

No, that was not the issue. It had more to do with politics. The roads programme was the single-most important success of the NDA. The present government took its time to see if it could give a certain amount of breathing space before it claim(ed) the programme as its own. A lot of time was spent on reviewing contracts.

There was this huge euphoria of the NDA having built India's roads. It is natural for a new opposition political group, having come to power, to distance itself from the success story of the last government. Things are back to a good clip. Projects are happening probably at the same pace or much faster.

We seem to be thinking of large infrastructure projects in isolation. First came the road sector project. Now we are talking of a railway corridor. Will we not be wasting resources in creating competing facilities when the infrastructure should actually be complementary?

Let me handle your question a little differently. Technically, and in a purist's way, you are correct. Historically, we have always had a shortage market, be it products like scooters or cars or LPG cylinders. When you have a demand-supply gap, you don't fine-tune the market. You just get on with production. In a shortage economy, the natural response of those in government is to first make up that shortage.

In today's economy, the shortage aspect is in public utilities. We have moved from a product market shortage to an infrastructure utility shortage. Just as in a shortage economy, the response is to increase capacity, so it is with infrastructure. There is no point in debating whether, say, between Delhi and Mumbai, the trunk route should be railways and whether you should have a hub-and-spoke arrangement for road transport. The way the Indian freight market is growing... Infrastructure capacity building has to normally precede economic growth by a factor of 1.8. So, if you expect economy to grow at 10 per cent, your infrastructure capacity has to be created at 18 per cent — 1:1.8 is the thumb rule. And that is per annum. If you are expecting India's GDP to grow at 8 per cent, then you should be creating, in advance, capacities at India's ports, airports, etc., to a level of 15 per cent, and when you compound it in three years, it will become 60 per cent. In five or six years, you are talking of doubling of capacities. This is in a normal situation.

When you have a 50-year historical backlog, surely, you are looking at most systems augmenting capacities even by a higher ratio. When that is so, this is no time to think of fine-tuning. Just build more roads, ports, and railroads.

There could be a counter argument of what the situation would be like if there were a capital scarcity. But the problem today is that there is not a single infrastructure project that is languishing for lack of finance. Multilateral and bilateral funding is available. We are not in a capital-scarce mindset. We are in an enhancement of capacity mindset; let us not get into a debate and stall the process.

If reasonable thinking has been done for capacity augmentation with modern technology, go ahead with it. On balance of considerations, in spite of these deficiencies, in a shortage economy, go ahead and create capacity. There may be pockets or regions of lack of optimisation or inappropriate resource allocation. We will live with it at a cost. But get on with it.

I would not go for the either/or argument right now. The argument to increase capacity is all-pervasive.

Are we still talking of annuity-based projects or of projects where real tolls are collected?

This is a loaded question. Underlying your question is the assumption that tolling is better than annuity. There are different ways to skin the cat and there are horses for courses. At one end of the spectrum is the pure state-funded PWD construction contract. At the other end is a pure 100 per cent private sector, risk-oriented project. You build the project, you collect the toll, if you are successful you are in business, otherwise you fail.

These are two ends of the spectrum. In between are many halting steps which are relevant to market conditions, either in a local area or in an evolving mindset. When you move on from a construction contract funded by PWD, the next step is a construction contract which is implemented by non-PWD. It is still a construction contract, but one where the state tells you `I will give you cement, steel etc., and you build'.

Then you move on to EPC, where you call the private sector and say `you procure, engineer and construct and I will pay you'. From EPC, the next level of risk is annuity, saying you are not to take market risk, you take the risk for construction that you will finish on time and, as per my design, and for your financial closure. Out of the three risks — development risk, market risk and construction risk — you take construction risk and development risk, which is financial risk, and I will take market risk. But get on with it. That is annuity.

From annuity, you go to shadow-tolling, in which I will pay you by the number of cars that cross your road, but if the traffic falls by less than what you imagine it to be, I will make up the shortfall so that you don't lose your shirt. Then you go to the ultimate risk model — real tolling. Now, each of these staging posts have a logic. There are large stretches of the country where you can only do a PWD contract. There are areas where the toll will not be paid or the market risks are very high, but the project has great externality, where you have to do an annuity. In a network as large as India, there is no one good or bad model. The yardstick by which the government should be held accountable is whether you have chosen the right model under the right circumstance. Please do not discard or accept one model as more superior to the others.

Where is the need for a new special purpose vehicle for infrastructure? There are so many institutions, IDFC...

It is not a question of the number of institutions. It is the charter of the institutions. All the institutions have shareholders who have come in with their capital for a certain rate of return on equity. These are companies with balance-sheets which are evaluated on the profits they generate. Which definitely constrained them to only lend to profitable projects.

Infrastructure development projects, most of them on paper, do not give an internal rate of return (IRR) which meetd conventional capital market norms. These are pure economic externalities that are created and which cannot be captured in the revenue stream of a company. Infrastructure is about generating externalities which make sections of the geography or industry more competitive or approachable than they were before. If you recognise the fundamental fact that externalities cannot be transferred into IRRs, then you need a vehicle that recognises it. The people in the Finance Ministry have seen this.

This class of institutions, which we think are development, are not development institutions at all. They are investment banks. They are in the business of lending money, with a little bit of sector specificity.

Now, to construct a rail freight corridor or a BOT project on an annuity basis, where is the funding going to come from? For this, you need viability gap funding for which we need a special purpose vehicle (SPV).

The SPV is project tight. We are now moving from programme lending to project lending. They are different classes of institutions.

In the infrastructure sector, unlike in manufacturing, projects do not come with viability built around them. They have to be made viable by giving grants, higher tariffs or capital grants. Sometimes, they have to be given cross-subsidies. The viability gap is one of the measures of making infrastructure projects viable. If there is a project that is on the edge, giving it 7 per cent IRR and if you want to take it to 12-14 per cent, a viability gap capital grant makes it possible so that you get funding for financial closure.

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