The contours of the proposed infrastructure development and financing institution, National Bank for Financing Infrastructure and Development (NaBFID) are beginning to take shape with the appointment of the former Chairman of the erstwhile ICICI –perhaps among the last of the Development Financial Institution (DFI) Mohicans, in what is now a largely vanished skillset and expertise – as its head.

Raising infrastructure has been a perennial problem for most emerging economies. Limited fiscal resources of government married to poor financial market infrastructure, in an environment of poor project implementation, regulation and adjudication, have been unable to meet the gargantuan appetite of this essential, growing but long gestation sector.

For without a strong foundation of infrastructure, no nation can hope to break out of its low-income orbit into a higher trajectory of economic growth.

India’s experiments with infrastructure can be summed up in two sentences -

1) The initial, immediate post-Independence phase of “commanding heights of the economy” and “Temples of modern India” of government and Planning Commission directed investment.

2) The liberalisation phase commencing in 1991 – of the “Public-Private Partnership” (PPP) model of infrastructure concessions to the private sector with market-led investment and funding.

While there have been some notable successes, both models have largely failed.

In the first, the limited fiscal resources of the government and competing claims on them have been unable to invest at the scale required. It has also been plagued by poor implementation, cost overruns, unaccountability, and poorly conceived and structured projects with multiple “white elephants” across the country.

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In the second, the lemming-like “jugaad” tendency of most entrepreneurs rushing into the sector that drove bids for PPP concessions to ridiculously unviable levels and beyond their bandwidth for implementation in overconfidence of being able to game the system for both, their financial returns and financing. They were unable to “manage”, with multiple allegations of corruption and gold plating of costs. The implementation environment too turned hostile, and many went bankrupt.

So we are back to the drawing board, nearly 75 years after Independence, to seek a solution to this intractable problem.

The landscape we survey remains largely the same in terms of its description. An even more fiscally constrained government battling demands of the post-pandemic, moribund markets of risk capital/equity from entrepreneurs in the sector, limited appetite from banks that are still licking their wounds while making provisions for their last orgy of lending excesses and poor decisions, and limited pools of market capital – equity or debt – to undertake the perilous journey of long term infrastructure financing.

To get answers to this Entrepreneur– Equity – Debt – Project Implementation conundrum, let us address each.

Entrepreneur – there are hardly any entrepreneurs who can undertake infrastructure projects at the scale required. Except for very few, most of the big players of the sector are already in distress or bankrupt from the last round. Any lead of infra entrepreneurship for a new round will therefore likely have to be led by a structured government initiative.

Equity – the National Infrastructure Investment Fund, which is anchored by a minority government holding, can potentially raise significant long-term equity resources from both domestic and foreign investors.

Debt – the banks are both risk-averse and likely not competent to appraise and manage the risks. The debt markets are not developed at the long tenure end, with large enough capital pools in the hands of institutional investors. Infrastructure debt – in fact even equity – is totally unsuitable to pose to retail capital markets as history shows.

Project Implementation – the ground-level challenges of infra project implementation are now well known. Contractual disputes, arbitrations, land acquisitions, right of way, environment litigations, PILs, payment disputes, delays, judicial interventions and litigation, counterparty contractual default etc., the risks are many and after the experience of the last cycle, not many in the private sector are equipped or willing to handle it.

This brings us to the larger issue of the scope of most infrastructure projects in public policy and possible answers to the question posed – To ERR or not to ERR?

Those who have worked in infrastructure markets are well aware that due to their network multiplier impacts, the economic returns of infra projects far exceed their financial returns. A simple illustrative case in point is say, NOIDA Toll Bridge.

NOIDA Toll Bridge that connects south Delhi with Noida over the river Yamuna, has had poor financial returns, undergone debt restructuring and its concession stands cancelled and is under litigation. Its equity share price trades at Rs.6.70 today.

As a stand-alone project company from a financial – Internal Rate of Return to investments made - point of view, it is a failure. However, the impact its implementation has had on the local economy, particularly on the Noida side, is incredible. The immediate impact on real estate, urbanisation, business, industry – besides employment, improved education, healthcare of local populations, etc, have all contributed significantly to Noida’s growth, as also a rise in tax revenues to local, state and central governments.

The Economic Rate of Return (ERR) of this project – not captured in the financial failure of the project company – far exceeds its cost.

The ERR success but IRR failure, therefore, requires a zoom out in scoping of the infrastructure project, to capture some part of the ERR value. A significant beneficiary of the ERR, as also the sovereign with instruments to levy on other beneficiaries, is the government.

The government is also in a position to leverage global strategic geopolitical imperatives for availing large pools of multilateral funding at significantly concessional rates e.g, the Japanese funding for the bullet train.

The government is also best suited to troubleshoot real-world ground implementation problems, not facing any counterparty or trust issues that plagued the PPP.

Ergo, a government-sponsored Development Financial Institution of some form or shape, to undertake some large, sector-specific projects through concessional multilateral funding sources could help revive the otherwise dead sector. An ERR approach can help it capture larger gains in the local/larger economy arising from the implementation of the project better through additional fiscal streams to its exchequer, than the predefined and limited scope concession IRRs of the private sector. These pooled tax streams from multiple projects can also better help it absorb the risks to its own fiscal position arising from its quasi/implied guarantee for these multilateral borrowings.

The risks are undoubtedly huge – appropriate project scope and structuring, implementation to time and cost, foreign exchange (borrowing being in foreign currency but revenues in rupees, and repaid over long tenures), multipliers as projected, tax revenue buoyancy from the projects, adequate ERR capture and appropriate fiscal structuring, manageable limits of quasi/implied sovereign guarantee to the new DFI in context of projected fiscal situation, etc.

But, it is undeniable that at this time and stage, something urgently needs to be done to address the stalled elephant of the economy in the room and build the platform for future growth. And, the only one that can do it is the government.

To ERR or not to ERR is, therefore, not the question. Can we afford not to take the risk and do nothing? “Whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous fortune, Or to take arms against a sea of troubles. And by opposing, end them?”

Maybe the screen of the future may return a 404 ERR, but surely worth a try? This government, if anything, has demonstrated above-average skills of implementation and delivery in multiple mass programmes of cooking gas, toilets, affordable housing and in overcoming administrative lethargy and bottlenecks.

Perhaps, it will be able to deliver on a few large, properly scoped infrastructure project programs implemented in mission mode?

The decisions are difficult. Even as discussions rage and the outlines of the proposed institution and its strategy take shape, one thing is certain. Infrastructure claims Hamlet as one of its very own.

—Sandeep Hasurkar is an ex-investment banker, and author of Never Too Big to Fail: The Collapse of IL&FS and its trillion rupee maze. The views expressed in the article are his own.

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(Edited by : Kanishka Sarkar)

First Published:Oct 29, 2021 1:01 PM IST