Inside Modi's game plan to bring in investment for infrastructure

Two king-sized numbers stand out in Nirmala Sitharaman’s budget: Rs 100 lakh crore and Rs 50 lakh crore. The numbers — estimates of investments required for infrastructure development across the country and the railways, respectively — suggest the government is now willing to make enough space for private players who can bring in the money.
The finance minister said on July 5 that Rs 100 lakh crore (roughly $1.45 trillion) was needed for infrastructure development across the country in the next five years. Sitharaman seemed to have chosen the words carefully when she said “the government has announced its intention to invest” this amount. The government would have to bring in Rs 20 lakh crore a year to meet this target. The Economic Survey, presented a day before the budget, had said the country has been able to put in only $100-110 billion (Rs 6.8-7.5 lakh crore) annually into infrastructure when it needs to pump in $200 billion (Rs 13.6 lakh crore). That means the private sector, which contributes onethird of the investment into the core sector in India, needs to be cajoled a lot to ensure a flood of money comes in. The FM has proposed to set up a panel to do the job.


In articulating the second figure — Rs 50 lakh crore, or $725 billion, which the railway infrastructure would need between 2018 and 2030 — Sitharaman was more candid.

She said public-private partnerships (PPPs) were a way to go, given that the capital expenditure outlays of the railways were around Rs 1.6 lakh crore per annum, way below the railways’ infra needs.

So how can the government turn on the money tap?

Several government officials and chief executive officers ET Magazine spoke to for this story said the government would now change its PPP model to put more focus on a hybrid one. In other words, the government would share risk more equitably. This would lower the private partners’ project risks, free bottlenecks in securing bank loans and fast-track financial closures.

Once that happens, it will be well-aligned with the private players’ longstanding demand that they be given butterfly projects — industry-speak for more developed ones — and not the caterpillars, which require development from scratch.

What this means is that the government would, barring a few exceptions, no longer invite private players to build capital-intensive infrastructure projects from scratch (for example, Terminal 3 in Delhi airport and the greenfield airports in Bengaluru and Hyderabad).

It would, instead, hand over hundreds of existing assets — roads, airports and railway stations — on long-term leases to the private sector for maintenance.

The model, sources say, will largely be a fast replication of two experiments made in the recent past — TOT (toll, operate and transfer) in highways and leasing of six functional airports — Ahmedabad, Jaipur, Lucknow, Guwahati, Thiruvananthapuram and Mangaluru — to private players. The cabinet last week approved leasing of three of these airports — Ahmedabad, Lucknow and Mangaluru — being run by the Airports Authority of India to Adani Enterprises for 50 years.

Ten companies, including GMR, Cochin International Airports and AMP Capital Investors (UK) Ltd, had bid for the projects and Adani won. In a TOT model, government-funded road projects that have been operational for two years are put to bid, as was done early this year, and the concessionaire gets the right to collect the toll for 30 years. The concessionaire makes an upfront lump sum payment to the National Highways Authority of India.

Another instrument that has been deployed in the recent years has been the real estate investment trusts, to sell land in central public sector enterprises. Such innovative financing models have fetched the government about Rs 24,000 crore, says the budget.

The government’s plan to ramp up private investment goes beyond the tweaking of PPP models, says NITI Aayog Vice-Chairman Rajiv Kumar. “New areas are being opened up for private investments. Two very big sectors — oil and gas and mining — are likely to attract huge private investments,” he says.

Kumar had chaired a panel that looked into liberalising the oil and gas sector. Its recommendations were accepted by the cabinet in February. “I am now chairing a committee on the mining sector where there is a potential for private sector investment. The idea is to liberalise mines, minerals and coal so as to ramp up production. We will ensure that mining becomes attractive to the private sector,” he says.

Auctioning of mines is not around the corner yet — the panel has to make recommendations which have to be accepted by the cabinet. But the railways might see a slew of private investment immediately, if the ministry has its way.

A senior railway officer says that taking coaches on lease from private players — as airlines do with planes — could be the first big move of large-scale PPP in the railways. Economics clearly favours such a move. If the railways wants to replace the 47,000 coaches made at the Integral Coach Factory that are low on safety standards, out its total 61,000 coaches, it will require Rs 2.58 lakh crore to make the purchase. That is an average of Rs 6 crore per coach, according to the railways. Leasing, however, would need a fraction of that money.

The lease price of coaches will be known after the Delhi Metro Rail Corporation (DMRC) awards a bid to procure 150 coaches for 25 trains on lease for a section. This process — a first in India — could set a standard for leasing of train coaches in the country.

“The tender is under evaluation,” DRMC spokesman Anuj Dayal says. DMRC currently has 336 trains with 2,206 coaches, each costing Rs 8-10 crore, marginally above the price of a railway coach. “There is a scope for PPP in station development, track maintenance, signalling and even running of private passenger and freight trains,” says a senior official in Rail Bhawan, the headquarters of the government-owned transporter.

The railways’ brush with PPP has been limited so far. Only a handful of projects — such as running of container trains, setting up of an electric locomotive factory in Madhepura (a joint venture with Alstom of France) and construction of a 538 km section between Sonnagar and Dankuni in eastern dedicated freight corridor — have been done in PPP mode. It is no secret that the private players running container trains on railway tracks have had bitter experiences.

The private sector, which has had an unsavoury experience with PPPs during the past two decades, is only cautiously optimistic of the government’s plan. “Two big hurdles in PPP in India have been the misplaced focus on private participation in construction rather than brownfield asset monetisation and the lack of dispute resolution and contract enforcement,” says Shailesh Pathak, chief executive officer of L&T Infrastructure Development Project, which last year launched India’s first privately placed infrastructure investment trust.

No wonder, India’s rank in the contract enforcement subset of the World Bank’s Ease of Doing Business has been abysmally low at 163. The nation’s legal system, as described by the recent Economic Survey, is the “single biggest constraint to doing business and thereby fostering investment.”

For the government, the big challenge would be to walk the talk and recreate a PPP environment that encourages the private sector. This would probably be the only route for Modi government 2.0 to come closer to achieving the two big budget numbers.