‘The greatest guarantee investors have is that India is a democracy’

HONG KONG: On the sidelines of Euromoney’s Asia-Pacific Infrastructure
Congress in Hong Kong, DNA Money spoke to Arvind Mayaram, joint secretary,
department of economic affairs, ministry of finance, on a range of issues relating to infrastructure projects in India.  Excerpts from the interview:

What is the level of foreign investor interest in India’s infrastructure projects?

There is a lot of interest: investors recognise there are a lot of opportunities in India. But there are also a lot of questions. There is still a lack of information on the legislative and regulatory frameworks, the availability of finance, and the kind of operational issues that may come up. Therefore, for interest to be converted into investments, we must make greater efforts to educate investors about the Indian system.

Far more than in China, for instance, the rule of law holds in India. So, why does this concern linger?

Even in the best of investors, there is a degree of ignorance about political systems. Investors, especially from the developed countries, have taken their political systems so much for granted that most of them don’t dwell on the fundamentals of their own political systems. When they look at countries like India, they are befuddled by what they consider the chaos in the political system.

There is a distinction between a very stable government and a very stable political system. India has a very stable political system. This is an aspect that most investors forget. From 1991 onwards, there have been different shades of government, but there is consistency in policy. There has been no major cataclysmic change in policy, which shows the stability of the political system. There may be ideological differences on issues, but there is only a spectrum of 5% left and 5% right.

Secondly, the Indian system may take longer to respond, to take diverse shades of opinions and build a consensus. But having done so, it is cast in stone. When we say that as far as systems and policies are concerned, investors can rest assured, it is because of this strength of consensus that underlies every decision of the government.

To my mind, the greatest guarantee an investor has in India is that the system is a democracy, and the rule of law is above everyone else.

Is the investors’ concern also an overhang from the collapse of the Dabhol power project?

Of course, Dabhol had an effect, but it also showed up a problem of credibility even on the part of the private party. And the collapse of Enron validates that.

Even now, if the private sector thinks it can have its cake and eat it too, it will be very difficult in India. In India, you have to do business as business, not plunder. I may sign anything I want, but the courts have the authority to judge if it’s within the law and the constitution. It is subject to public scrutiny, so you’d better keep your nose clean. That’s how it is in the US too, where the level of disclosures is stringent.

Anybody who wants to do serious business will find India a good place to work in, and get good returns. But if you want to be a fly-by-night operator, India is not the place.

In hindsight, however, it was good that Dabhol happened because it immediately pitch-forked us into a new paradigm. But that’s already changing. Now, more and more investors are coming in. Over time, when they start making money, they will be the real ambassadors who can tell the world that things work differently here.

Foreign investors frequently bemoan the absence of a deep enough and mature enough debt market in India.

The government has done much to deepen the debt market. The establishment of the Infrastructure Development Finance Corporation (IDFC) is one of them. In India, most of the debt paper in the market is for short tenures: 5 to 7 years. Appetite for long-term paper isn’t just about creating that instrument. We also allowed the ADB to raise rupee funds from the Indian market through issue of 20-year bonds. ADB has successfully raised two tranches of $100 million each.

These attempts to deepen the debt market will probably be followed by other intermediaries — commercial banks and so on. Once you have a fairly large number of players, the second stage of debt market will emerge. It is a process of evolution.

To what extent has the Viability Gap Funding (VGF) scheme helped enhance investor interest in infrastructure projects?

The VGF is a new scheme, and is fundamentally sound, because it takes into account a pragmatic issue: the capacity to pay.

In India, since we’re looking at inclusive growth, infrastructure should be available to everyone, and therefore the capacity to pay is a critical consideration. If you don’t do that, you could have highways on which no vehicles travel, airports where no aeroplanes land. But then if your tariffs are pegged low, you won’t get good returns. The government therefore steps in and says: we’ll give you the chance to bring your project cost down, and get better returns.

But the VGF scheme also enforces a lot of discipline. We ask for a number of things a priori: it should be a public, not a private, project; the tariffs should be determined up-front; it should be transparently bid out; the concession agreement should be known to everybody before the bid-out; the bidding process must be in a particular manner. When you’re asking for that kind of rigorous discipline, it takes time to develop projects in that format. But once a pipeline is built - which is what we’re trying to do - it will come to a takeoff stage.

We believe it will take about two years for projects to be conceived under the VGF and for them to fructify.

Even a couple of years ago, there was a proposal to dip into our foreign exchange reserves to fund infrastructure projects. But today, it appears, money isn’t a problem, but finding bankable projects is.

The RBI had some reservations on the proposal to use foreign exchange for projects; we also don’t believe there is such a shortfall as to require a major policy change. We haven’t found any project not being implemented for want of funds.

Till now, most public projects weren’t conceived in the way a bankable project has to be. But that’s changing.