Infrastructure’s a 3-letter word

Lalu, aspiring for a power management guru status, says that of the Rs 300,000 crore he needs for the next five years to turn the Railways world-class and sustain its two-year-old turnaround and unbelievable growth, 40 per cent (or Rs 120,000 crore) will come from the private sector. But — and it’s a big but — PPPs will happen only in non-core activities like container train operations, construction of dedicated freight corridor, modernisation of railway stations, warehouses and so on. Handing over core operations to the private sector would mean embracing the P-word and that, even while being an efficient model, remains out of bounds. For now. His budget too will unveil the PPP plans.

His competitor in the high-end segment, Civil Aviation Minister Patel, throws another hat in the PPP ring — the setting up of merchant greenfield airports, that is private airports built on privately owned lands and adhering to civil aviation norms. Looking at traffic growth and two-hour-long waiting periods to land, this is aside from the need to build secondary airports in non-metros in the next five to 10 years. The government, he says, will have a smaller role — regulation — to play in airports across the country and the Airport Economic Regulatory Authority Bill will be introduced in Parliament in the Budget session and the authority should be in place this year itself. His bill, we hope, sees the light of day.

PPPs are not just within India. This week, at a dinner with former US defence secretary and CEO of Cohen Group William S. Cohen and former US ambassador to India Thomas Pickering, both here to lead the biggest-ever delegation of 52 US defence and aerospace companies for Aero-India 2007 that begins today, we were told the stakes are $30 billion (Rs 132,000 crore) worth of defence procurement, spread over the next five years. The companies are here not only to sell their products but to set up joint ventures — like the co-manufacturing agreement between Northrop Grumman and public sector Bharat Electronics to be signed today. What they’re enthused about is the expected transparency in defence procurement process.

Apart from knowledge, the other word that we are going to keep hearing and reading and watching in 2007 and going forward is PPP, particularly in infrastructure. From service contracts where under public ownership, public capital and public risk, private entrepreneurs will get short-duration projects to manage operations, to three to five year management contracts, eight to 15 year leases, 25-30 year concessions that will come up on roads, airports, railways, ports, urban development. And, of course, energy, the first to take off but lagging miserably today.

It is this infrastructure that will simultaneously drive and sustain the 9-10 per cent GDP growth story. And it is this thrust that the stock market has recognised. Unlike in the West, where infrastructure has been developed over decades and now is a slow-growth industry, a “widow’s stock” as investment managers put it, the case in India is quite the opposite. It’s not surprising, therefore, to see infrastructure companies quoting at PE multiples commanded by FMCG or IT. The sheer growth potential of this business and what it can do to development and wealth creation powers this process. The money’s all there — if 25 per cent of $320 billion financing is given to the private sector, and a hundred companies take these projects, it means organising equity capital of around Rs 3,500 crore each on a 3:1 debt equity ratio. Raising this money is not so difficult any more.

What is difficult is changing mindsets, realising that development of public infrastructure is no longer the monopoly of the public sector. Chidambaram is right about creating regulators in each sector to oversee and standardise processes, norms, contracts, enforcement and suchlike. We hope these regulators, once appointed, will play neutral umpires and not be smothered by inertia and create mountains of paperwork to hide their lethargy. We also hope the government will have the vision to select some of these regulators from outside the closely guarded and shamelessly hierarchy-driven bureaucracy. We also hope these very important appointments will not end up as post-retirement jaunts for retired bureaucrats. (I was told recently that under the UPA administration not a single IAS officer has “really retired”.) We also hope that if there’s a competent bureaucrat, he will not be excluded — let merit rule.

But simply embracing PPPs is no guarantee for success, it is not even a guarantee for attracting private players. This model, while sounding very sexy and futuristic, needs many changes that the political economic system of today is ill equipped to provide. Transparency, for one. Which policymaker worth his file would be willing to write a tight contract that puts both parties — public and private — on a razor’s edge of delivery? Loopholes-based old thinking must give way to new ideas like accountability, a reward-punishment model that give adequate incentives to the private entrepreneur but with stringent penalties for non-performance. The biggest challenge for reformers in the UPA administration is going to be selling these reforms to their colleagues and coalition partners. But that they must, for finally PPPs must evolve into vehicles of development, they must become wealth enablers.