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  • Infrastructure: money spent versus money borrowed

    Article by Rajeev Thakkar in Live Mint, April 25, 2016

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    It is time to be bold and seize the opportunity created by the global environment, and at the same time be disciplined in project execution and pricing
    Infrastructure: money spent versus money borrowed
    Photo: Jayachandran/Mint

    When the announcement for the Mumbai–Ahmedabad “bullet train” was made in the Railway Budget of 2016, a lot of people wondered aloud whether this was the best use of money in railways and that some other projects were probably would be a better use of the money.

    What these commentators missed is the means of financing of the high speed train. As a finance professional, I am happy with the terms of financing. A 50-year-loan with an interest rate of 0.1% per annum and a moratorium of 15 years—what is there not to like in the terms? Apart from this, in all the din over some high profile corporate defaults, there have been other international deals announced, for example, funding of the Lucknow and Nagpur metro rail projects. People who ask questions like why this and not that forget that there is a choice to do both.

    There are a few factors that must be taken into consideration in this debate.

    First, the world is awash with low interest rate funds. Eurozone, Switzerland, Japan, and the US all have either negative or extremely low interest rates.

    Second, commodity prices are at lows. Whether it is steel or energy, the prices that we see at present are far lower than what we have seen in the recent past.

    Third, most of the world is stuck in a low-growth phase.

    These factors are creating a perfect condition for India to tap resources to build some sorely needed infrastructure in India. We are in a position to do this at a low borrowing cost. The borrowings need not distort the deficit or borrowing numbers of the government if they are done through special purpose vehicles (SPVs) or corporations. The equipment, technology and materials needed to build the infrastructure will be available at a reasonable cost given the low commodity prices and low growth environment.

    Apart from the direct benefit in terms of creating employment and infrastructure, these projects will lead to capacity building and expertise and will cause a flywheel effect for the entire economy.

    This applies not just to railway or metro projects, but all sorts of physical and social infrastructure.

    There will be a lot of naysayers. The first point that they will raise will be the foreign liabilities created by these projects. In isolation, this may seem scary. However, one has to look at it in a balanced manner. A metro rail project, for example, will also result in savings on our oil import bill.

    The true risk, in my view, is not the currency risk or debt. It is project execution and in politicians giving away freebies. Time and cost overruns have been recurring problems with infrastructure development in India. What seems to be a viable project if executed in five years becomes a mill around the neck if it takes twice as long to complete.

    The other issue is with fair pricing of services. There is an expectation that the mai-baap government will provide everything free or at throwaway prices. A lot of people have the tendency to compare, say, the suburban rail system in Mumbai to the metro rail services in New York. What they conveniently ignore is the fact that a single ride on the Metro would cost $2.75 (about Rs.180) whereas a Churchgate–Andheri ticket would be Rs.10 per ride. Surely one needs to take into account the purchasing power of consumers in India but one should not expect the pricing of the new infrastructure to be that associated with British era infrastructure.

    While the interest cost is close to free and the debt is long term, the principal cost of the borrowing and the operating cost of the infrastructure must nevertheless be paid. If the early investors do not see discipline by the borrowers, the lending and infrastructure development will come to a grinding halt. We have seen many start-stop developments in the infrastructure space in India. We cannot afford one more fiasco.

    It is time to be bold and seize the opportunity created by the global environment, and at the same time be disciplined in project execution and pricing.

    The original article could be seen here.

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