Bridging the (infra) gap
Government needs to help reduce costs and increase returns for investors in infrastructure. But it needs to do it carefully....
It’s often easy to forget that at least notionally,India’s economic strategy is still laid out through Soviet-style five year plans. This week’s mid-term appraisal of the Eleventh Five Year Plan (that runs from 2007 to 2012) served as a reminder,never mind the irony that its presiding officials were the two men most closely associated with taking India away from the stagnant path of Soviet-style planning — Manmohan Singh and Montek Ahluwalia in their capacities as chairman and deputy chairman of the Planning Commission.
The only point of real interest that came out of the meeting was the focus on infrastructure. Of course,one doesn’t need to present statistics to confirm the still inadequate state of India’s infrastructure — anyone who has done business in India will confirm that (with the relevant comparisons with China) while adding that this remains the single biggest bottleneck in fast-tracking India’s growth story.
And if there is one economic activity which for better or worse still needs some long-term planning and government intervention,then infrastructure it is. Why? Because as even a beginners’ textbook in economics will tell you,infrastructure requires massive financial investment,of a scale that isn’t always easy to mobilise,particularly when the returns on investment are relatively low compared with the costs,and usually accrue with a long time lag. That sort of business scenario doesn’t always make the private sector enthusiastic participants,which is why the government needs to lend a hand. But since government in India is generally poor in delivering quality public goods by itself,some private participation is necessary to ensure high quality outcomes. So the aim of government intervention should be to try and ensure that investing in infrastructure is a profitable proposition for the private sector.
The government,of course,recognises this. Perhaps that’s what prompted at least a couple of interesting ideas from the top echelons of the government at the mid-term appraisal meeting. The first is the suggestion floated by Pranab Mukherjee that private sector firms be allowed to float tax free bonds for infrastructure. The second was the prime minister’s strong endorsement of the need to completely overhaul the regulatory regime for infrastructure.
The finance minister’s proposal to allow private sector players to issue tax free bonds tries to address the financing/cost side of the infrastructure equation. Bank finance for infrastructure projects comes with an interest rate in double digits. In comparison,the interest paid on tax free bonds would be in the single digit range,around 7 per cent. So raising finance through tax free bonds would certainly reduce costs. The only problem is the other distortions that such a move would cause.
From a practical perspective,it will be hard for the government to identify which private sector firms will be eligible to raise funds in this manner. If the decision is discretionary,it will lead to lobbying and rent seeking,hardly the direction in which policy ought to go. Even if an objective criterion like net worth is used to pinpoint eligible firms,there will be the problem of favouring bigger firms over smaller ones,compromising a level playing field. There is also the problem of identifying which sectors constitute infrastructure — while roads,ports and airports are obvious candidates for inclusion,what about borderline sectors like hotels for example? There are also uncertain implications for India’s nascent corporate bond market.
Given the downsides in allowing private sector firms to issue tax free bonds,such a strategy may be best avoided. That is not the same as saying that the government shouldn’t try and make finance easier for private players interested in infrastructure. But perhaps it best that the government just extend aid as explicit project-based subsidy,like in the existing Viability Gap Funding model — that won’t cause rent seeking,bond market distortions and a perversion of a transparent tax regime.
But that is only the financing/cost side of the infrastructure equation. There is also the revenue side — if private players are to invest,even with some government subsidy there needs to a reasonable revenue stream from the project once completed. This is often hard in infrastructure — it still isn’t easy to charge profitable sums for using roads in India,or using airports or even for selling power to state-owned distribution companies. And that is why the regulatory dimension,flagged by the PM,is so important.
There is an urgent need for all the different infrastructure sectors to have strong independent regulators that operate at arms-length from both the government and the private sector participants. Because only a credible independent regulator will be able to impartially adjudicate on the pricing decisions made by private players who sell their infrastructure for use by the wider public.
Left to themselves,private sector players may indeed charge too much for the use of a particular road,airport,port or electricity. Most infrastructure sectors don’t naturally lend themselves to competition within — if indeed there is more than one player,collusion may be an equal probability to competition.
The government,constrained by the weight of doing what is politically correct,may prevent private sector players from charging what is even reasonable. In many cases,the government may be an interested party,like in the case of government-owned power distributors,or as a partner in a PPP road or airport project.
At the moment,many of these conflicts are for real — roads and airports,to take just two examples,have no independent regulator that can adjudicate on user charges,which some people think are too high and others believe are too low. That needs to change if infrastructure is to attract more profit-making investors. The challenge is big,but at least the government is thinking.
The writer is a senior editor at ‘The Financial Express’.
dhiraj.nayyar@expressindia.com
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