Opinion Level playing roads

Finance Minister Pranab Mukherjee would do the sector a massive benefit if he can insist that infrastructure policies will not be tampered with in the next four years. The results are then sure to start flowing in. To realise the significance of taking such a step,Mukherjee just needs to see the shattering changes made in road sector policies in the last one year of the first UPA government and what disaster they have brought. The pace of road construction slipped to less than 2 km a day,while the government moved to first cap the number of bidders in any project to five,then moved away to single bidders — and then leaked information that,instead of asking the developers to bid on BOT basis,or both building and earning revenues from the project by charging tolls,it would subsidise unviable stretches by going in for annuity models,or shadow tolling.

The finance ministry has now changed the rules for roads and other public-private partnership projects (revised RFQs) by mandating that the bidders must have a turnover that is at least twice the cost of the project. However,nowhere in the new set of rules does it say that these will hold good for the next,say,five years. Since an average road project of about 100 km costs upward of Rs 500 crore,often near Rs 700 crore,it would be a crazy bidder indeed who would take a chance on that sort of investment if he is not sure of some stability in policy.

While the road sector exemplifies the problem starkly,the problem,of variability in rules,afflicts the entire swathe of infrastructure sectors. In three budgets since 2002-03,when the concept of “viability gap funding” was first floated — as Infrastructure Equity Fund — the rules have changed. The concept itself is very sound. Since infrastructure projects often include a substantial risk element that banks or even long-term financial institutions are wary of funding,the government should finance that segment of the cost.

In the first place,getting from the budget that announced the scheme,to the finance ministry

finally figuring out a workable way to implement it,took over a year. Then,repeated tweaking of the scheme substantially weakened its utility and effectiveness. Till April 2009,as per government data,projects worth just Rs 16,471.7 crore ($3.2 billion) have been cleared under viability gap funding,for all of which the Centre has earmarked Rs 3,228.89 crore. Almost all these 15 projects are for the construction of roads.

A prime minister’s committee has estimated the Indian bill for infrastructure projects at $500 billion. The delay is crucial,as successive changes to the rules and the policy environment have meant that in most years till now not more than 70 per cent of the annual amount earmarked for funding projects could be utilised. And these numbers severely underestimate the problem; since the viability gap funding has a tremendous leverage potential,the potential amount of investment foregone is several times more.

The problem of rule-instability extends to several areas. Take the case of tax treatment that affected oil and gas exploration under NELP-VII. The finance ministry issued a clarification to Section 80(IB)9 of the Income Tax Act,restricting the tax holiday to only oil manufacturing companies. Gas explorers were left out; they had to pay the tax. This,despite the entire bunch of bidders aligning with the petroleum ministry saying this should have been made explicit before they made the bids.

These are glaring deficiencies. And the remedy is straightforward: not to bring in more rules but to simply let the current set of instructions outlive their validity beyond a span of one year. Instead,what the government needs to do is push for effective regulation and implementation of the current policies. Obviously,any set of policies will have an adverse impact on some companies. But rule-instability not just constrains investment,it allows companies to change the rules by lobbying — something that reminds one of the worst aspects of the industrial licensing policies of the past,fortunately now near extinction.

Every commentator that knows the area,like Amrit Pandurangi of PwC,has pointed out that this is the sector’s biggest bane.

Just how opaque and changing polices can stymie a sector can be seen from the experience of the mining sector. The sector allows for 100 per cent FDI except for atomic minerals and non-captive use of coal. But as the ministry itself has acknowledged,the non-transparent and cumbersome “concession grant” system (which means the chap who tracks a deposit has no certainty that he will get to mine it) combined with a poor regulatory system (there are no regulators for the sector; which means there are no checks on companies that ruthlessly destroy the eco-system with unscientific mining practices and so make the poor believe they are exploitative) creates a tremendous barrier for the sector’s development.

How big is that barrier? In 2008,South Africa spent $378 million for exploration of minerals. China spent $370 million for the purpose. In the same period,India could rustle up,guess what,$5 million for the purpose,as per data with the ministry of mining.

So,for a start,India must learn to start thinking big.

subhomoy.bhattacharjee@expressindia.com