Across the infrastructure sector, including roads, the biggest challenge is the lack of capital. The market cap of developers and contractor-turned-developers is about $40 billion after the stock market rose by an average 50 per cent in the last three months. Before that, it was $25 billion.
The private sector has to contribute nearly $500 billion in the 12th Plan to develop infrastructure. With two years of the Plan period over, if we set an investment target of $400 billion, at least 25-30 per cent (or $100 billion) will have to come as private sector equity. At present, most firms in this space – with the exception of L&T – have promoter equity of around 65 per cent. So, in effect, foreign direct investment (FDI) is the way forward.
Why is FDI not flowing in? I have dealt with foreign investors for three years and they do not like inconsistencies in the tax regime. Incentives granted to the sector in 2000-01 through the 10-year tax holiday were effectively lowered by MAT. Section 80 M, which prevented double taxation of dividend, was withdrawn in 2004. These changes happened in the last 10 years and investors usually don’t make any money for the first 8-10 years. All they are asking for is consistency in the tax regime. If we need $300 billion, banks do not have the capacity to lend that much. So the capital raising process has to be altered to make long-term funds available.
Project execution is another critical point. A process is, therefore, required wherein the Centre and State sign up to ensure all clearances at village level – land acquisition, utility shifting, law and order, sand availability, aggregates – by a pre-determined date. For every product and service that the private sector cannot access from the free market, there should be a written commitment with high penalties if the conditions are not met. No respectable investor – sovereign funds or multilateral investors – would want to deal with these risks.
Sometimes, revenue streams get discounted due to delayed State clearances and political interference, leading to leakages of 3-4 per cent. Because of this, In the next bidding round, developers will assume 15 per cent leakage. So, all premium projects will become grant-based for the Government. We are all facing higher discounts.
(As told to Mamuni Das.)