The road ahead for infrastructure

Finance Minister Arun Jaitley has called his own Budget an infrastructure-focussed Budget — something that is being projected as critical for laying the foundation for ‘Make in India’ to happen.

There is no doubt that the state of infrastructure is poor in our country, and this distracts capital investment, especially the Foreign Direct Investment — FDI.  Therefore, can we say with confidence that the Budget focus on infrastructure is in the right direction? Not really. There are a number of reasons for saying so. The most important among those is the chosen path for the delivery of this allocation — Public Private Partnership.

Let us first examine the need. The 12th five year plan had estimated the amount for the infrastructure investment as Rs 55.75 lakh crore for the five-year plan period.

The NitiAayog on assessing the progress inferred arrived at the conclusion that there was a shortfall of 30% in the first two years of the 12th plan, and it would be same for the third year as well. Union Minister Nitin Gadkari also indicated that India still needs about Rs 67 lakh crore of investment in infrastructure to meet the requirement anticipated in the 12th plan.

Legitimate to enhance spending

Therefore, it is only just and legitimate to enhance the expenditure on infrastructure — irrespective of the ‘Make in India’ campaign! The infrastructure focus in the Budget is largely confined to the roads and railways; the allocation for roads and railways is Rs 40,000 crore each, an increase of Rs 14,031 crore and Rs 10,050 crore respectively over the current fiscal year. Now, what is important is that this translates into completed projects and increase in the infrastructure for use, and that does not seem likely to happen.

Railways in India need to be examined from various angles and therefore here we confine ourselves to roads. In 2015, India had the second largest road network in the world, spanning a total of 4.87 million kilometres. This is used to transport over 65% of all goods in the country and 80% of the total passenger traffic. The road density is high in India but due to poor quality, if one takes only all-weather roads into consideration, the road density becomes one of the lowest in the world.

Therefore, there is no doubt that this sector needs greater public investment, and hence, it is a welcome step to have greater union government allocations for the same. However, the record of PPP is discouraging in India for all sectors in general and for roads in particular. And despite mention of several measures to address the issues related with implementation in the Budget itself, given the nature and extent of vested interests, it is highly suspect that the intended investment will take place, and even if it does, one cannot be sure that it will convert itself into desired results.

A study by Planning Commission while looking into the PPP model of Delhi Noida DND flyway, one of the largest infrastructure projects, had found that the private party had no incentive to cut costs in the project.

A detailed study by Thillai and Gopinath from IIT Madras on the issue of PPP in the road sector in India in 2012, showed that PPPs cost the exchequer much more than non-PPP road projects, and therefore, it is an important public policy question to ask whether this is the most rational and efficient choice for developing roads. The IITM study points out that the cost overruns are much more common for PPP projects in the road sector than in non-PPP projects.

It was seen that 88.1% of PPPs had cost overruns as compared with 54.37% in non-PPP projects. This was despite the fact that PPP projects had less time-overruns. The average percentage cost overruns in a PPP was close to three times that of what was observed in a non-PPP project, according to this study. It also reported that these numbers are important as the average project size of a PPP (Rs 382.46 crore) was about a half more than that of a non-PPP project (Rs 253.89 crore). The RBI Deputy Governor K C Chakraborthy had also pointed out in 2013, that the over reliance of firms on the debt than equity to finance the projects reduces the stake of the private firm in executing the project in time.

Although the Budget has also proposed to respond to a few of the key issues that have stalled investments in the infrastructure sector, these do not necessarily address some basic concerns. The finance minister announced the formation of an investment and infrastructure fund and tax-free bonds for raising funds for investment in rail, roads and irrigation, and has also proposed introducing a Public Contracts (Resolution of Disputes) Bill to streamline the institutional arrangement for the resolution of disputes that have stalled projects. But this does not address the basic issue of deliberately inflated costs that has been widely observed in private infrastructure projects in a number of countries.
The countries adopt PPP model to be able to bring in the much-needed financial resources and management expertise but if it comes at a high cost to public exchequer, the very rationale becomes questionable.

One important aspect in the PPP model is how the contracts are drafted. The most important point is that PPP is hardly a partnership; and if at all it is, it is a very unequal partnership where all the risks are borne by the ‘public’ and all the profits go to ‘private’. The contractual arrangements are often such that private parties are covered for the risks ‘beyond their control’.

Revisit PPP model

This includes the most tricky and difficult aspects of land acquisition and people’s protests. This is going to be even more difficult if the private happens to be in the shape of FDI. It is believed that the present union government is hoping for a large chunk to be met through the FDI-based PPP for roads. International experiences show that such contracts are generally even more stringent in ensuring that their returns are guaranteed at a high rate of 12-14% returns for delays caused by the delays in land acquisition with penalties added on top of that. It is common for risks to be inflated which in turn leads to cost overruns.

It is also important not to view the issue of land acquisition and social protests only as management issues. These are genuine human, ecological and environmental concerns with serious social and economic costs.

Infrastructure development is meant for the use of people, and therefore we cannot ignore people-related issues. The solution for such concerns cannot just be in the form of resolution of disputes. These call for greater policy engagement and reforms in a manner that the responses to these concerns are also seen as integral to growth, as integral as the policy reforms for fair pricing or development of financial markets are.

(Jyotsna Jha is the Director at Centre for Budget and Policy Studies, and Madhusudan BV is the Research Advisor at Centre for Budget and Policy Studies)