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J. Sagar Associates advocates & solicitors
Ahmedabad | Bengaluru | Chennai | Gurgaon | Hyderabad | Mumbai | New Delhi
Challenges of Financing Infrastructure in India
Amit Kapur July 14, 2015 : New Delhi
INDIA POLICY FORUM
OUR NEEDS
• 12th Plan targets o US$ 1 trillion investment in INFRA
o 48% from Private Capital (including Overseas)
• Mid-term reset: 40% slash due to Capex constraint • So need 48% (US$ 480 bn or 300 bn) from private sector
when o Stranded/stressed capital (INFRA) hovers between US$ 200 bn to
US$ 300 bn
o Banking Sector stress: 31% of advances to INFRA stressed
• Economic Survey & Budget recognize need to lead with public investment: Reality Check o June 2015: CSO data shows Gross Fixed Capital Formation from
33.6% of GDP (FY 2012) to 28.6% (FY 2015)
o Of Household savings, most funds in gold & property
o Inability to monetize wasteful land bank in sick PSUs (like 1000 acres HMT land in Bengaluru)
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OUR CHALLENGES
• Doing Business country risk Overhang
o 186th amongst 189 in Contract Enforcement
o 142nd amongst 189 in Enforcing rule of law
o Vodafone
o BIT Issues
• Need to revitalize the environment/unclog the arteries before restructuring achieves goals
o 5 x 25 scheme will only kick the can down unless leaking bucket gets fixed & stranded capital made to sweat
• Need to implement Chanakya’s guidance in Arthashastra … “The root of wealth is (economic) activity and the lack of it (brings) material distress … both current prosperity and future growth will get destroyed”
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Till 14 August 1947
Pre-Independence :
PRIVATE CAPITAL
Constitution (1950);
IDR Act (1951); IPR (1956)
STATE OWNERSHIP, RESERVED
LISTS & LICENSING
Post 1991
PRIVATE CAPITAL & PPP
• Private Provision of Utility Service
• Private Ownership
• Reasonable return on investment
• Economic regulation
• Level playing field
• Single window approach: FIPB & CCEA,
NHAI Act, TRAI Act, Competition Act
Electricity Act, AERA Act, SEZ Act etc
EVOLVING FACE OF INDIAN POLITICAL ECONOMY Defining Framework for Infrastructure Financing
1947 - 1991
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CONSTITUTION: Economic growth with
distributive justice
• Preamble: o A sovereign, socialist, secular, democratic republic
o Committed to secure to its citizen justice : social, economic and political
• State policy must secure that o Ownership and control of material resources are distributed to sub-
serve common good (Article 39(b))
o Operation of economic system does not result in concentration of wealth and means of production to the common detriment (Article 39(c))
• Fundamental rights assured to individuals (Articles 14, 19 & 21)
o Fair, just and reasonable treatment
o Right to freedom of profession, trade, occupation, business
o Right to life with human dignity
• Freedom of trade, commerce and intercourse (Articles 301 to 307)
• Centre-state distribution of legislative, executive and financial powers (Parts V, VI, IX, IXA, XI & XII)
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Attributes of Infrastructure
The Playground of Political Economy
• “Public good/service” to citizen & economy
• Fundamental to reasonable life – state’s obligation
• Involve grant of concession (privilege to use some facility like spectrum, land/right of way, minerals) to the operator.
• Involve high upfront capital investments : cost of capital
o 75% to 85% is debt finance : for tenure 8 to 12 years (against asset life of upto 60 years) – repayment front-loading of tariff burden.
o Be serviced from tariff recovered from consumers unless offset by subsidy paid by government from tax-payer funds.
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Political Economy: SHORT-TERMISM comes in the way
Interplay amongst conflicting interests
State :
o Secure to citizen reliable and affordable infra
o In viable manner: safeguard public funds from subsidy burden
o Grantor of concession to build and operate any infrastructure facility involving use of natural resources (land, minerals).
Investors (public and/or private): expectation of earning reasonable return to service the capital
o Equity capital (promoters … dividend)
o Loan capital (lenders …loan repayment).
Suppliers of inputs to operate infra service : expect to be paid the price of inputs in a timely manner.
Consumers desirous of availing of reliable and fairly priced infra.
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The Elephant In the Room POLICY & REGULATORY MINDSET RISK TO PRIVATE CAPITAL
• Once invested, key attributes of private capital get significantly regulated:
o Investment decision (how much to invest, in what asset and at what location);
o Production decisions (quantity and quality);
o Pricing decision and line-of-credit decisions (whom to sell & terms)
o Return on investment/capital distribution decision.
o Exit options (when can you exit, at what value and sell to whom)
• Pricing and performance get tested and evaluated in context of the public nature.
• Get real “PARTNERSHIP” with focus on “OUTCOMES” going – discarding the “distrust”: P.P.P.
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MY WISH-LIST
• Robust contracting regime for
o Allocation of scarce natural resources
o Selecting concessionaires
• Address inherently incomplete nature of long tenure infra contracts
• Expeditious adjudicatory processes
• Making decision-makers who impact economic development and impede growth accountable for their decisions
• Restore trust in governance and our institutions
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MY WISH-LIST
• Law makers, policy makers, statutory agencies, courts must internalize some fundamentals
o Time-value-for-money crucial in decision making processes
o Accept capital as a primary factor of production : not evil.
o Distinguish Capital from the capitalist: punish the wrongdoer
o Distinguish entrepreneurship/philanthropy from luxury
consumption
o Unclog market design to unshackle growth
o Insolvency reforms
o Robust refinancing (take-out, 5 x 25 et al)
o Suitable Contract renegotiation mechanism recognizing
inherent “INCOMPLETE” nature of long term contracts.
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Some issues to tackle
• Getting to the sweet spot balance between sustainable growth / viability and welfare/ redistribution
o Capital is a factor of production for the economy once invested in fixed assets - distinct from who invests : public vs private
o Time value for money qua infrastructure facilities : telecom migration policy (1994 to 1999) vs. Dabhol and stranded assets
o Enforceability of contracts in time bound manner
Lenders and insolvency enforcement
What about “public interest” in the hands of SOEs and PSUs :Arbitration; Go - No go
o Limit short-term populist directives to absorbable fiscal limits of the economy (loan waiver/melas, subsidies and uncovered debt)
o Inertia is now spelt with a “C”: 5 Cs … Courts, CVC, CAG, CBI, CIC (Central Information Commission)
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Thank You Amit Kapur
Comments and queries are welcome : amit@jsalaw.com
+91-9899381000/+91-11-49370630
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Three I’s are hurdles to rational policy choices and growth .. Ignorance, Interests and Ideology : Paul Krugman
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