Between the 11th Plan period (FY07-12) and the 12th Plan (FY13-17), infrastructure investment was projected to rise 2.3 times, from Rs 23.8 lakh crore to Rs 55.7 lakh crore. And, within this, the big jump was to come from the private sector (see graphic), where investments were to rise from Rs 8.8 lakh crore to Rs 26.8 lakh crore. Instead, what was achieved was a mere Rs 12.8 lakh crore, as a result of which overall infrastructure investments rose just over 55%—undoubtedly impressive, but nothing compared to what was required. One obvious reason for the collapse is the huge stress in corporate sector balance sheets. Look at all the big players in the infrastructure space, like GMR and GVK, and they are in no position to invest more unless they can lower existing levels of debt. Under the circumstances, the government did the best it could and rapidly ramped up public expenditure. Investment allocated for roads, for instance, rose from Rs 96,931 crore in FY16 to Rs 148,071 crore in FY18 and from Rs 97,931 crore to Rs 131,000 crore in the case of Railways. And the government has just announced the bullet train between Ahmedabad and Mumbai at a cost of Rs 1.1 lakh crore and the Bharatmala road project at a cost of Rs 5.35 lakh crore. The key, however, is to get private investment to revive—a tall task given the state of the balance sheets of most private sector players and the fact that existing PPP projects face too much uncertainty in the sense of delays in getting land and other clearances, and there are also force majeure-type events of the sort that hit the Tata and Adani power projects.
The Hyderabad Metro, dedicated to the nation by PM Narendra Modi on Tuesday, is a good example in this context since, unlike most other metro projects that are 50:50 JVs between the Centre and the state governments, this is a PPP executed by L&T where the only money spent by the government was in acquiring land for the project and in the viability gap funding of around Rs 1,100 crore. Around half of the revenues for the metro are to come from real estate development of around 18-20 million square feet. Before anyone says that is a huge sop given to L&T, keep in mind that even government metros such as the one in Delhi have been given huge dollops of real estate precisely for this reason, to keep the fares low and keep the metro viable—and yet, despite this, the government investment remains high in metros like Delhi. If land has to be given to each metro anyway, naturally it makes more sense to build them privately. And unlike the Delhi metro which is mired in controversy over its recent fare hike, the Hyderabad one has a built-in fare escalation each year linked to inflation.
The Hyderabad metro is not quite out of the woods as it will incur cost overruns of several thousand crore rupees due to delays in land being acquired, right of way being provided and the route-alignment being frozen. How this will be resolved is critical since, if Telangana does not fulfill its end of the bargain, it is difficult for any private sector project to continue successfully—L&T, however, stuck with the project despite all the adversity—and for banks to fund them. In this case, the contracting is tight and provides for such eventualities, so Telangana will have to pay for its delays. But contracts matter little if the state is not willing to honour them or is going to delay payments on one pretext or another—eventually, L&T will get its money if it goes in for arbitration or terminates the contract, but why should things even be allowed to get to this stage? Reports are things are better now, but it is possible another player would have walked out by now.
In the roads sector, to draw a parallel, where thousands of crore rupees of private contractors had been stuck in disputes with NHAI, it was only last year that the Centre came out with a policy to ensure contractors got the bulk of their money back quickly. It is policies to encourage PPP that the government will have to come up with if it hopes to revive the infrastructure boom of the past. There is, after all, only so much that the government and PSUs can spend and if this is the driver of infra-spend, the pace of growth will depend upon the execution ability of the public sector. While execution has been good in both roads and railways, the sad state of the ambitious BharatNet project is testimony to just how poor public sector execution capability can be.
The other problem of how such projects are to be financed remains since banks have burned their fingers in infra-lending. To the extent it is coming back, in hybrid annuity model (HAM) projects, it is because the government is taking more of the project risk. Whether through HAM-type projects or other ways, unless the government addresses issues of risk, getting bank finance will be difficult—in L&T-type cases, if the compensation is not given on time, both project developers and banks/financiers get wary. Given much of the bad lending took place because banks didn’t follow prudent policy and, in the case of roads, for instance, NHAI accepted wildly optimistic bids, it is also critical this be addressed if private sector participation is to rise to the expected levels.