Projecting a pipeline

One way of helping project finance revive in India is by demystifying risk - and the government has just taken a useful step in that direction

This newspaper has reported that the government will create a “National Infrastructure Pipeline” that will “include greenfield and brownfield projects costing above Rs 100 crore each”, in order to “tell investors at what stage of execution each of these projects is in and offer a realistic assessment of whether to put money into them or not”. 

We don’t know enough about this pipeline, but the principle should be unequivocally welcomed. It shows the government is serious about the prime minister’s Rs 100 trillion target for infrastructure investment – and, further, that it understands what the private sector needs for this target to be made a reality. 

It is important to judge this move in context, in order to understand why something apparently small might be more momentous than is immediately visible. There is a reason why “a project pipeline” comes up frequently in conversations with foreign investors, particularly those who represent patient pools of capital like insurance and pension funds. India is still seen, for various reasons, as a “black box” in terms of risk. Investors do not just fear sub-par returns or currency depreciation. They fear outright capital loss through investing in projects that fail to take off, are belatedly subject to regulatory or legal intervention, or in which their Indian partners do not uphold their side of the deal. We have to face the fact that Indian dispute settlement mechanisms and the administrative and regulatory structure do not inspire confidence in the face of such fears. 

This is why global private capital would like to turn to the Indian state — as a partner or a guarantor — in its forays into project finance. The assumption that many make is that the best way to avoid catastrophic capital loss is to ensure the state in some way shares your exposure. This is, in its way, not a bad assumption. The problem, however, is that it puts intolerable demands upon the Indian exchequer. 

Illustration: Ajay Mohanty

The need, therefore, is to figure out ways in which the Indian state can serve as a partner, de-mystify political and regulatory uncertainty about India, and get inside the “black box” of risk without straining the exchequer excessively. What a project pipeline that is monitored by the government can do is effectively serve as a state-run rating agency at the project level. Finance then can get on with its job of matching pools of capital with the appropriate risk-return level of the projects in the pipeline. 

It is important to note that such a pipeline will not by itself reduce risk. But it will clarify risk, and thereby reduce uncertainty. If properly designed, it will help the market develop by increasing the amount of information available. 

The point to be noted here is that it is not necessary to argue that new information is itself being discovered by the state in order to construct this pipeline. One does not have to imagine flocks of government auditors descending on each project that is a candidate for such a list. Such an effort – while in many ways helpful – would face constraints in the medium term because of state capacity and monitoring weaknesses. Instead of such a vision, what is required as a first step is simply the collation in an easily digestible format of information that is already with various state organs about projects, private and public, and sharing this information with possible investors. 

Of course, one could ask whether there is an implicit mismatch of expectations here. Many investors might look at a project pipeline and assume the government is indirectly guaranteeing these projects, even the private ones. The government is unlikely to make any such claims. In fact, the truth is that the government probably isn’t even able to guarantee, in the short term, accuracy of the raw information that it will collate in order to populate the project pipeline. This may lead to problems in the future unless expectations are properly set in advance. 

In addition, as with any actions by the state which could benefit private players – in this case, by making certain private sector projects more attractive to investors by demystifying their risk profile – collusion or corruption is always a threat. The government will have to structure construction of the pipeline carefully in order to avoid actual or apparent improprieties. 

Nevertheless, this idea has extraordinary potential. One major additional facet would improve it even further: An examination of the impact of any such project on India’s transition to a more climate-sensitive economy. Infrastructure projects that increase rural resilience or factor in adaptation and mitigation targets, therefore, should be highlighted as such. In the end, finance will of course make decisions on the basis of risks and returns; but the risk of stranded assets, thanks to climate change, is one major possible risk, going forward, and the impact of warming (or of regulatory changes as part of India’s nationally determined contributions under the Paris Agreement) should also be part of the information set being made available to investors. 

Finally, no idea has ever existed that is so good that the Indian bureaucracy could not ruin it. And the most likely source of such spoiling is the inherent unwillingness to work with and for the private sector. It should be made clear to those designing and administering the pipeline that this is a marketing and analysis tool not for the government, or project implementers, or voters, but strictly for investors. It should be set up in a manner that helps that group and that group alone, or it will fail. There is an implicit acceptance through this measure that India is not itself so attractive that foreign investors are enthused. In other words, the state cannot approach such investors with its customary arrogance. Nor need it think of them simply as looking for handouts or concessions. What it needs is to listen with humility to their requirements, and put its vast reserves of information at their disposal. The Indian state is many things, but humble is not one of them. But a project pipeline is, at its root, an advertisement. Not the bragging sort that one might see at investor roadshows, but a genuine one that creates trust between government and capital. Such trust is surely lacking, and the government has identified one pathway to creating it. It must not lose this opportunity.

m.s.sharma@gmail.com Twitter: @mihirsharma