‘First Manage And Maintain, Then Build’

<div>O<strong>nno Ruhl</strong>, country director, World Bank, speaks to <strong>Anjuli Bhargava</strong> about how India needs to get its infrastructure act together and not abandon public-private partnerships<br /><br /><strong>What would be a good way for India to finance its massive infrastructure needs?</strong><br />The ideal way for India to finance its infrastructure is in any way imaginable. No single source is large enough. If you look at the sources, the first source has to be public finance &mdash; the government&rsquo;s own books, financial institutions and a bit from foreign institutions. <br /><br />It makes sense to focus first on maintenance of infrastructure. There is a lot of infrastructure out there and you can get a lot out of it by maintaining it better.&nbsp; It could be very dangerous to say build new roads but not maintain the roads that are already out there. This is a very costly mistake many governments make because in the end they have to rebuild what they already had. There is no higher return on infrastructure than maintaining what already exists.<br /><br />Actually, that&rsquo;s not true. Management of infrastructure may be even more crucial. With regard to new investment, the government needs to prioritise investment to areas where the private sector is unlikely to go. Also, as you go towards the trillion-dollar range, it&rsquo;s quite important for the government to spend whatever money it raises judiciously since what it borrows crowds out private sector borrowings. So, it is important to first manage what you have better, then maintain and then only build.<br /><br /><strong>How successful has India been with the public-private partnership (PPP) model?</strong><br />India has been quite successful with PPPs, especially in terms of the volume of money it has managed to attract. It now has a lot of PPPs based not on the underlying projects but the balance sheet of the corporates and the willingness of the banks to finance the corporates. <br /><br />The problem is that the model is limited by the size of the balance sheet of the corporate and how much exposure the banks can have to the same corporate. That limit was reached just when growth was slowing down.<br /><br />The logical next step is to identify which asset classes are more amenable to this kind of financing and then be much more aggressive in creating financing for it. The balance sheet of the corporate has no further leverage. But there is leverage in projects that are really well structured; people will finance them. Then, how well the project is designed and how well risks are assessed become critical. There is a lot more scope in this but it will be in projects which have more revenues. Projects like airports, captive roads, bridges, and so on. <br /><br /><strong> There is no denying that PPP in airports has given India far better facilities, but many feel that it was at too high a price...<br /></strong>It is possible that some of these airports are somewhat over-dimensioned. In Delhi, for instance, Terminal 1 does not look over-dimensioned but Terminal 3 does. In some other country, they may have built one wing and then another wing and, in that way, kept costs down. That would not be a bad idea.<br /><br /><strong> Government officials will say that if they build small, they will be accused of being myopic...</strong><br />We at the World Bank are, in fact, guilty of advocating under-dimensioning as we are so hung up on the economic rate of return. Sometimes we don&rsquo;t see how dynamic the market can be. In urban areas, right-sizing is difficult as the growth is so fast &mdash; it is difficult to imagine under-dimensioning anything. <br /><br /><strong> The Indian roads sector is also going through a lot of pain. People are talking of abandoning PPPs in roads altogether. What is your view?<br /></strong>Partly, it is the same problem of banks lending based on corporate balance sheets, which can only be leveraged to an extent. Then, in some cases, there were optimistic assumptions about traffic forecasts. So, bidding did become quite aggressive. Also, many construction companies became bidders and it was the construction that they were really after. So, it is a mix of things. <br /><br />I don&rsquo;t think that justifies abandoning PPPs for roads. India should just learn from it and see which ones work and which ones don&rsquo;t and based on that, structure projects differently.<br /><br /><strong>Hardly any project has worked. Everyone is looking to restructure, renegotiate or get out of PPPs...<br /></strong>Globally, close to half the PPPs that are contracted are renegotiated at some stage. It is just exceptionally difficult to figure out revenues and returns for the next 30 years.<br /><br />Renegotiation in India is frowned upon. Since you are re-opening a deal, you could be accused of corruption. It is very tricky. <br /><br />The best solution will be a form of arbitration that is fast and which both sides will actually stick to. The government of India, in fact, has a track record of not sticking to arbitration and then going to the courts, which is not helpful. This requires a change in attitude. It has to become a more business-like relationship.&nbsp; <br /><br />(This story was published in BW | Businessworld Issue Dated 24-03-2014)</div>