Infrastructure investment hits slow lane

In her maiden budget presented to Parliament on July 5, 2019, Finance Minister Nirmala Sitharaman laid a roadmap for catapulting the Indian economy to $5 trillion by 2024-25. The most crucial component of this roadmap is the investment in infrastructure to the tune of a mammoth Rs 100,00,000 crore or $1.4 trillion.

In the follow-through, in an interactive session with the media on August 24, 2019, she announced setting up of a high-level inter-ministerial committee to work out a detailed action plan.

During its first term also, the Narendra Modi government gave overriding importance to building infrastructure. Indeed, it achieved a fair amount of success with a cumulative investment of about Rs 20,00,000 crore and commensurate output in terms of roads and highways built.

This was commendable especially in the backdrop of virtual drying up of private investment in the highway sector towards the end of erstwhile UPA-II between 2012 and 2014.

It took up project implementation mostly under EPC (engineering procurement and construction) mode wherein funding was done entirely by the government itself by way of budgetary support supplemented by borrowings by National Highways Authority of India (NHAI) on its behalf.

From early 2016, it also latched on to HAM (hybrid-annuity model) under which the Centre bears 40% of the cost and the balance is arranged by developer.

During that period, the government was helped by an unprecedented surge in the direct tax revenue (especially in personal income tax) during 2016-17 and 2017-18, courtesy demonetisation which forced hoarders to bring unaccounted cash to banks as also savings from plugging leakages in implementing welfare schemes.

However, from now onward, the scenario does not look promising. Even as the required investment is many times than during Modi’s first term in office, there is a question mark over governments’ ability to fund it.

There are inherent vulnerabilities in all four possible modes - budget support, borrowings from banks and financial institutions (FIs), enticing private sector to invest and overseas borrowings.

First, budgetary support is predicated on the ability of the government to achieve the projected increase in tax revenue. In this regard, the trend of the collection during 2018-19 does not offer much hope.

During 2018-19, the total tax collection of Rs 13,10,000 crore was a mere 6% higher than in the previous year. Further, this was a whopping Rs 1,70,000 crore less than even the revised estimate Rs 14,80,000 crore as per interim budget.

The target for the current year is put at Rs 16,40,000 crore (down from a high of Rs 17,00,000 crore proposed in the interim budget) which is Rs 3,30,000 crore or 25% higher than the actual of the previous year. This is well nigh impossible when seen in the backdrop of a pittance 6% increase during 2018-19.

As regards borrowings from banks and FIs, these institutions are still to come out of their precarious financial state notwithstanding major reforms such as Insolvency and Bankruptcy Code (IBC) and a heavy dose of recapitalization by the union government.

Further, the bank managements have become extremely circumspect in sanctioning new loans due to the fear of facing action from investigation/prosecution agencies under the current environment of a high standard of accountability.

Coming to the third mode, in the past, private entities didn’t show interest in building projects albeit under BOT (build, operate and transfer) despite getting viability gap funding from the union government. As a result, the latter was forced to bear the brunt.

Currently, over 90% of the projects are being bid out entirely on Centre’s funding. In this backdrop, to expect the private sector to invest looks far-fetched.

Finally, the government could also explore the possibility of overseas sovereign borrowings (a proposal was mooted in this years’ budget even as officials hinted at borrowing $10 billion from this route).

But, that is contingent upon India strictly adhering to fiscal discipline and may be fraught with serious risk. So, too much of reliance on this source is also ruled out.

What then, is the way forward? How can the government maintain the momentum of investment in infrastructure; in fact, scale it up to achieve the target?

The Prime Minister’s Office (PMO) is reported to have suggested that NHAI should stop construction; instead, focus on the management of assets already built by it.

Upfront payment

As a step forward, it may auction all completed projects under the so-called toll operate and transfer (TOT) model. Under TOT, private companies will take over completed roads for 10 to 20 years and make an upfront payment to the NHAI.

They will be allowed to collect toll and also maintain the stretch for the agreed period. This way, the NHAI will be able to unlock value, generate resources and leverage the same for supporting further investment. The idea is anomalous.

A private entity which has no money to contribute to promoters’ share (not even 20% he is required to chip in under hybrid annuity model or HAM) and is, therefore, unable to take up a green-field project, how can it be expected to pay for full cost of a completed project upfront?

Another idea mooted by PMO is ‘to consider each road stretch as a project and set up a special purpose vehicle (SPV) to assess its financial viability and invite bids from private entities with viability gap funding to make it financially sustainable’. This is old wine in a new bottle. It evoked little response in the past and is unlikely to happen in the current scenario which is even worse.

Let us face reality. Investment in infrastructure has hit the slow lane. The reasons are four-fold — the prohibitive cost of acquiring land; highly leveraged and stressed construction companies; weak balance sheet of banks; precarious state of union’s finances. Until these core issues are addressed, the goal of $1.4 trillion investment in infrastructure — to make India $5 trillion economy — will remain a pipe-dream.

(The writer is a New Delhi-based policy analyst)