About a fortnight ago, the last date for receiving bids for the Tilaiya ultra mega power project in Jharkhand was deferred by the Power Finance Corporation. This large 4,000 mw coal-based project — costing Rs 16,000-18,000 crore — is already running behind the original schedule as per which it should have been handed over to a private sector company, selected through international competitive bidding, over a year ago. The latest deferment, limited to one month as of now, was on the request of prospective bidders like Tata Power, who cited the credit crisis and sought additional time to make a bid.
We all know that the economic situation is unlikely to turn around by December 1, which is the new bid deadline, but we are told that no additional time will be given for this ultra mega project being built under the public-private-partnership (PPP) umbrella. Shorn of jargon, what PPP essentially means is that the private sector company arranges all the funding for the project (equity & debt) and the government promises not to stand in the way or rather to “facilitate” the ride through the red tape. Occasionally, the government also extends some viability gap funding (VGF), which can go up to 20 per cent of the project cost, but rarely does. While the worries on the state of investments in the power sector and the mounting deficits are decades old, the larger worry is the impact of the country’s reliance on the PPP mantra for resolving the country’s infrastructure woes.
PPP projects account for much of the $500 billion-odd required to fix India’s infrastructure over the next few years. The power sector requires the largest investment from this pool (about 40 per cent), followed by railways, roads, ports, airports and a host of others. Even before the current financial crisis, there were doubts expressed over the capabilities of the private sector to mobilise the funds required to plug the infrastructure gap, despite encouraging signs from some large PPP projects.
For instance, the Rs 8,600 crore Delhi airport modernization project or the Rs 5,800 Mumbai airport modernisation project required no subsidy or VGF from the government. Neither did the Rs 2,287 crore Dahej LNG Terminal or the Rs 3,710 crore Hazira LNG Terminal. Likewise, in the case of the first three ultra mega power projects at Sasan, Mundra and Krishanapatnam, which have already been handed over to the private sector companies (Tilaiya is the fourth), there was no funding coming from the government.
India’s PPP database (www.pppindiadatabase.com) captures all approved projects at the centre and the state level from 1996. There are 300 projects listed on the site involving an investment of about Rs 135,000 crore ($28 billion). The total VGF for these projects is a mere Rs 974 crore or less than 1 per cent. Additionally, there is a subsidy of about Rs 9,400 crore also extended to these projects. Add the two (VGF and subsidy) and even then, government funding is limited to about 8 per cent of the overall project cost. The single project which is inflating these government support numbers somewhat is the Rs 3,000 crore Kochi metro rail project which will run over a distance of 25 kilometres on the Alwaye-Petta stretch. A subsidy of almost Rs 2,000 crore has been provided. Otherwise, the bulk of the 300 projects under the PPP banner are sailing on their own steam.
In the current economic situation, however, not only is the private sector capital-constrained — in addition to being in a high-interest rate regime — it also has a diminished appetite for such long-term large-scale investments. In highway construction, for instance, companies like Larsen&Toubro, Hindustan Construction, Nagarjuna Construction, Maytas Infrastructure and Gammon have actually withdrawn from some 15 highway projects recently. In the last two months, five highway projects worth Rs 3,000 crore could not find a single bidder.
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Even though the government may be fiscally constrained, it is imperative for it to step in at the current juncture. Investments by the government in infrastructure projects will provide a dual advantage to the Indian economy. On the one hand, it will serve the purpose of pump-priming — generating jobs, income, demand and spends, and on the other, it will reduce the 1-2 per cent drag-effect that poor infrastructure has on the country’s growth and boost the GDP numbers.
This brings us to the next challenge — that of increasing the quality and quantity of “bankable projects” on which work can begin at a snap. If the government were to magically swish out Rs 50,000 crore for instance — perhaps out of the oil and infrastructure bonds that it no longer needs to issue — it is likely to face a wait to deploy these funds as there aren’t too many infrastructure projects ready to take in money.
A shelf full of bankable projects is not going to come through a magic wand. It has to be worked at, and that too at a pace which is at least ten times better than what it was a few months ago. Otherwise the pain of the current downturn could last much much longer than the six to nine months projected by Finance Minister P Chidambaram.