Opinion

Rebooting the infrastructure sector

Kushal Kumar Singh | Updated on November 09, 2020

Financing of infrastructure needs a major rethink   -  REUTERS

It is time to revive the public-private partnership model with some tweaks to restart projects stuck during the Covid crisis

The current year has been unprecedented for India’s Infrastructure sector in many aspects. It started with a promise of revival, weighed down with financing challenges and flailing private sector interest, through the $1.4-trillion National Infrastructure Pipeline (NIP).

The promise, however, was shortlived in the wake of the Covid-19 pandemic. The focus has shifted from strategising for achieving the NIP to undertaking measures to tame the pandemic’s impacts and tentative reforms to the improve infrastructure-financing landscape.

Typically, infrastructure development is categorised in two segments — one where the investments are proposed to be recovered from user charges and, two, where infrastructure is created primarily through public investments.

Since economic activity has taken a massive blow due to the pandemic, projects conceived to recover investments through user fee such as airports, ports, roads, pay-per-use facilities, and tourism infrastructure have experienced considerable revenue-generation challenges.

This would lead to vocal demand for reassessment of the risk allocation frameworks and broadbasing the risks. Globally, even in pre-Covid times, developers had become careful in bidding for projects where the demand risk was passed onto to them as for such projects, the developer’s ability to forecast and manage such demand is limited.

For infrastructure development through public funding also, the challenge is multifold. Due to the reduced economic activity, the monetary capacity of governments has been significantly constrained. In these pandemic times, government expenditure on health and livelihood support has increased significantly, leaving little or no funds for other activities.

Further, the fact that increased market borrowing may lead to inflationary effect, has also limited the options of the government. So, administrations now need to navigate these challenges and invest resources on three clear priorities to revive the sector:

The recovery:

Covid has altered how the infrastructure is being utilised and has significantly affected the demand and revenue realisation in projects across sectors.

While some sectors, especially transport and logistics have witnessed a sharp recovery, other sectors are still struggling. There have been measures undertaken by infrastructure agencies to address temporary Covid impacts such as working capital loans or invoking force-majeure provisions.

However, a more fundamental and lasting change in project drivers is expected on account of Covid which transcends beyond the temporary measures. Sustainability of many of existing projects, as well as investors, would be contingent on the timely and a more comprehensive restructuring of the projects. It is imperative that a policy driven approach is adopted.

Sustainability:

One of the key challenges identified for the infrastructure sector has been re-invigorating the Public-Private Participation (PPP) framework and the infrastructure financing landscape. The key to sustaining private investments in infrastructure requires a concerted effort on long-standing demands:

(a) Risk Rebalancing of PPPs: The essence of PPP is to allocate risks to the party that is best able to manage them.

There is need to review risk allocation in PPP projects to ensure a more favourable ecosystem for private players as well as financing institutions to partner with government entities in the task of infrastructure creation.

There needs to be a transition from risk allocation to risk sharing with the private sector to make PPP framework more equitable and robust. As a step towards rebalancing, there needs to be a decoupling of policy and regulatory function from the development responsibility of the infrastructure development agencies to ensure an arms-length partnership based on sound commercial principles.

(b) Broadening of investor base and tapping into long term funds: The current infrastructure financing set up is primarily driven by commercial lending institutions.

There is an inherent flaw in the asset-liability mismatch. The issue is further compounded by public sector agencies directly raising funds from commercial lending institutions leading to crowding-out. To ensure sustainability of the financing landscape, refreshing institutions and policies are required for channelling long-term financing.

(c) Resilient policy framework: Covid has exacerbated the situation, highlighting the imbalance in risk allocation, inadequacy of the PPP framework to withstand unforeseen events and more so, with lack of flexibility to address such situations.

While a robust PPP framework can address and deal with some events, there is a need for a policy-led approach for managing sector-wide events through a participative mechanism acceptable to public audit agencies.

(d) Accelerating dispute resolution: There has been significant value of claims stuck in arbitration and disputes in litigation. Delays in arbitral award and more so, inability to enforce the arbitral awards have diminished the role of alternate dispute resolution in India. With the stress induced by the pandemic and other reforms, accelerating dispute resolution is a pressing concern.

The demands are two-fold: Procedural changes to allow for resolution directly through commercial courts as well as strengthening for commercial courts to allow for a speedy resolution.

(e) Addressing land acquisition: Last but foremost, according to reports of the Ministry of Statistics and Programme Implementation, the sources of delay (and therefore cost overrun) in infrastructure projects are related to land acquisition, environmental clearances, Rehabilitation and Resettlement, removal of encroachment, shifting of utilities and availability of linkages.

While preparing projects, specific focus on these aspects and mitigating plans need to be included.

Rebound to future: As the investor ecosystem is expecting a revamp of priorities and sector transformation, it provides an unmistakable opportunity for the government to undertake a much- needed fundamental shift in the infrastructure development agenda towards sustainability and resilience. T

here needs to be concerted effort across the lifecycle of infrastructure development viz.

(a) Tailored infrastructure programme to identify, incentivise and promote projects with tangible social, economic and environment benefits.

(b) Broad-basing the risk allocation framework in infrastructure development projects involving private sector.

(c) Private investment and partnership framework for suited to impact projects.

(d) Robust project preparation framework that underscores sustainability resilience and specifically, impact of large-scale disruptions, during project preparation.

(e) Specific financing mechanism for high impact projects to be developed in discussion with DFIs.

The writer is Partner at Deloitte India

Published on November 09, 2020

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