Addressing the issue of fuel supply for new assets is the most important policy action that needs to be taken.
What would he like the Government to do to put the infrastructure sector back on the rails? The measures, says Dr Rajiv Lall, have to do with improving sentiment for capital flows and formulating specific policies for the sector. He has a grasp of issues confronting the infrastructure sector, not just because he is the Vice-Chairman and Managing Director of Infrastructure Development Finance Co, but also because he chairs the Confederation of Indian Industry’s Infrastructure Council and is a member of various Government committees in the sector. Dr Lall, who is also India’s representative to the G-20 working group on infrastructure, in this recent interview, deals with the problems facing the sector.
Excerpts from the interview:
What has gone wrong with the infrastructure story?
If you have to answer what has gone wrong, you have to first answer what has gone right. What has gone right in the power sector is that private participation in generating capacity creation has far surpassed expectations. The Planning Commission’s estimate was for a total investment of $500 billion over the Eleventh Plan, of which a quarter was to come from the private sector. The latest estimation of performance during the Plan period is that we have invested $500 billion, of which 37 per cent has come from the private sector. A third of our 200,000 MW of generating capacity is in private hands.
Lack of fuel, especially coal, to keep up with the massive growth in generating capacity has caused the problem in the power sector. The implications are that power plants that are coming on stream will not have enough coal to operate at plant load factors that are sufficient to service their debt even after the moratorium period is over.
This will make lenders cautious about wanting to support the creation of new generating capacity. It will, in turn, haunt developers who are finding it harder to raise either equity or debt to invest in new capacity.
This is a vicious cycle that we have got into. It has been triggered by the success of attracting private capital and participants in the creation of new generation capacity. It is almost as if the rest of the system has not been able to keep pace with this growth, causing knock-on difficulties and affecting sentiment, availability of finance …
There are other things as well. Access to international capital has become harder. That has not only to do with the changing risk appetites among the international community, but also the perception and reality on the slowdown in the reform momentum in India. That has contributed to a declining, or an uncertain macro-economic situation, that has made access to finance harder.
Another major problem is specifically associated with the telecom sector. There is a lot of uncertainty with respect to the regulatory and policy environment. Finally, on the ground, execution challenges have also become tougher as the system catches up with the pace of private investment. For instance, on the land acquisition issue, the system is reacting adversely to land being taken away at cheap prices. It is a complex issue that is caughtin a legislative tangle . The same holds true for environmental regulations.
Those who complain that this pace of growth is causing environmental damage, have a legitimate point of view. We haven’t been able to find the right balance to administer and regulate the scale of private investment that we need, from the point of view of keeping our growth momentum.
Would you advocate opening up coal mining to the private sector? And, an agency that will import coal, blend it with domestic coal and sell it to users?
There is a case for both. We have to address this bottleneck of coal availability at once. The easiest thing to do would be to import. If you import, the prices will be higher and, therefore, the question would be how much should a concessionaire in a long-term power purchase agreement be allowed to pass on to the consumer.
You can have a legalistic interpretation on that and argue that these developers who bid for these PPAs — under what is called Case 1 bidding — fixed the tariff without escalation for variable cost. Now that the variable cost has changed, why should the consumer pay for it. I don’t think that is productive because it will not lead to resolution of any problem.
After all, the Government also had its share of obligations in this process. At least for those projects for which coal was promised at a certain level but was not delivered, or is not being delivered, people have to be pragmatic in allowing the PPA to be re-crafted.
What is the government’s thinking?
I think the Government has shown a considerable degree of resolve in addressing problems that have an administrative solution. At least issues on decision-making, tightening processes and procedures, are being addressed. However, the Government is shying away from making quick decisions on wider issues such as the framework on which coal should be imported. I think time has come to address all of that as well.
We get the feeling that different arms of the government are working independently of each other...
It requires great effort for ministries to collaborate with each other. We are hoping the Prime Minister’s Office will continue to assert itself to solve those problems. My sense is that 65 per cent of our problems can be addressed just through more effective administration.
What would you like the Government to do to get the infrastructure sector back on the rails?
The Government should improve the sentiment for capital flows and formulate specific policies for infrastructure. To improve sentiment, if the Government were to make it clear that GAAR is off the table; that Vodafone will only be prospective, not retrospective, just these two announcements will go a long way in changing people’s perceptions and sentiments. It is a pragmatic response.
On infrastructure, I think finding a solution to the import of coal and its pass-through to revise PPAs, are important. Likewise, some kind of resolution on gas pricing such that work can resume in the KG basin, and alsofinding a solution to create a blend of KG basin and imported gas, is needed...
Specific action to address the issue of fuel supply for new assets is the most important policy action that needs to be taken.
On the telecom sector, decisions on the issue of spectrum pricing and the treatment of charges for what is considered to be excess spectrum for incumbents and the issue of re-farming of spectrum for those concessions that are coming to their end, need to be taken with care.
We must not lose sight of the economic benefit that this industry has brought to the country. Our line of thinking should not be to just maximise financial revenues for the Government.
Long-term India still has a lot of promise that we will overcome our temporary issues. Neither international capital nor domestic investment appetite will be a constraint.