For this potential to be realised, environmental, social and governance (ESG) concerns would have to be on-boarded into infrastructure projects as institutional investors look at these factors before committing investments
By Kumar V Pratap
The Union Budget FY22 was presented in Parliament on February 1 by finance minister Nirmala Sitharaman. One of the six pillars of this Budget is ‘Physical and Financial Capital and Infrastructure’. This is how it should be, because investment in infrastructure is necessary for growth and for making this growth inclusive, leading to development.
The Growth Report of the World Bank finds that fast growing countries of East Asia, in their fast growing phases, have spent 7-8% of their GDP on infrastructure.
While India was clocking this number in the Eleventh Five Year Plan (2007-12) period, infrastructure investment as a per cent of GDP has come down substantially to less than 6% since then, and 5% in 2019-20. Given that India has a target of becoming a $5-trillion economy by 2024 and reclaiming its position as the fastest growing large economy in the world, the status quo needs to be changed. Given the competing demands on fiscal resources, it becomes imperative to improve the efficiency of infrastructure investments so that these targets can be attained.
In this context, the Budget promotes three major initiatives:
—Augmenting public transport through buses (Rs 18,000 crore has been allocated for a new scheme for public bus transport) and introducing more cost-efficient technologies for metro rail in the form of Metro Lite and Metro Neo;
—Open access in distribution; and
—The launch of the national monetisation pipeline.
Every Indian city wants a metro rail for promoting public transport. However, the conventional metro rail is the most expensive form of public transport (at a construction cost of about Rs 300 crore per km on an average), and so is financially unsustainable. Introducing more buses and cost-efficient technologies such as Metro Lite and Metro Neo achieves the same objectives at a lower cost and, therefore, is more efficient and financially sustainable infrastructure expenditure. This needs to be welcomed both from the perspective of promoting growth, as also addressing environmental concerns, given that Indian cities are amongst the most polluted in the world and personal transport is a major contributor to this pollution.
A major efficiency-enhancing measure in the power sector is promoting open access in distribution in the form of allowing freedom to consumers to choose their power distribution company. A notable feature of the telecommunications revolution in the country is a similar freedom to consumers to choose their telecom service provider (from among RJio, Airtel, Vodafone Idea and BSNL-MTNL). This has led to rapid fall in telecom tariffs (from the highest in the world in the early 1990s—before the telecom revolution—to the lowest now) and its near-universalisation (with the current telecom density of 87%, from 1% in the early 1990s). Open access is a neglected feature of the Electricity Act (2003) and will receive a major fillip with the Budget announcement and would lead to similar efficiencies in the crucial infrastructure sector.
However, for this to be operationalised, carriage and content will have to be separated, with carriage being available on non-discriminatory basis, for competition in content to flourish. Also, the best consumers would want to move to the most efficient power distribution companies (discoms), leaving the weaker discoms with high-cost consumers and high-cost thermal power purchase agreements (PPAs), stretching their finances further. These discoms are in the public sector and would add to the fiscal stress.
Another noteworthy announcement is about the national monetisation pipeline, through which operational infrastructure projects will be concessioned to institutional investors like pension, insurance and sovereign wealth funds. This would improve the financing of infrastructure projects, given that more than half of debt financing of public-private partnership projects in infrastructure comes from bank credit, which suffers from asset-liability mismatch (ALM), contributing to the twin balance sheet with highly leveraged corporates contributing to the non-performing assets of banks. Institutional investment into infrastructure will not suffer from ALM as the liability profile of institutional investors matches the profile of infrastructure assets.
India has tried the toll-operate-transfer (TOT) model in the road sector and the Infrastructure Investment Trust (InvIT) model in varied sectors of road, power transmission, telecom towers, etc, and over Rs 0.8 lakh crore have been raised through these asset monetisation models. Looking at the scale of infrastructure investment required (more than Rs 18 lakh crore per annum for the six years of the National Infrastructure Pipeline, cumulatively adding up to Rs 111 lakh crore) and the vast pool of operational assets available with public sector entities (in roads, railways, ports, airports, oil and gas pipelines, power transmission lines, telecom towers, etc), there is a large potential and it is hoped that the national monetisation pipeline would help convert this potential into reality by making available well-prepared operational assets to institutional investors.
However, for this potential to be realised, environmental, social and governance (ESG) concerns would have to be on-boarded into infrastructure projects as institutional investors look at these factors before committing investments. However, we also need to be cognisant of the fact that much of infrastructure is under-priced and any additional concerns that are incorporated would have financial viability implications.
While ESG integration would help align infrastructure development with India’s Paris accord obligations and help finance the projected 450 GW of renewable energy by 2030, a call would have to be taken about the future of coal-based power generation projects, given that India is abundant in this resource. That ESG concerns are very much on the formal agenda of the government is apparent from SEBI floating a Consultation Paper on the format for Business Responsibility and Sustainability Reporting recently.
The author is currently joint secretary (UT) in the Ministry of Home Affairs, and former joint secretary (Infrastructure Policy & Finance), Ministry of Finance. Views are personal