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