June 25, 2018

Speaking at AIIB Governor’s Seminar on Mobilising Finance for Infrastructure, in Mumbai

Good morning, ladies and gentlemen. We are discussing liquidity for infrastructure projects and as one of our experts explained; there is a lot of liquidity in Mumbai city today to welcome all of us. Thank you very much for braving all that liquidity and coming to what is quite clearly the most  important session of the AIIB’s second annual meeting, which is being held in Mumbai.

The theme of this panel – and I consider that the most important – ‘Mobilizing Finance for Infrastructure’ – and this is how it is laid out. We have with us two prominent representatives of two Asian countries – India and Indonesia – to tell us what Governors feel in terms of the problem of infrastructure financing, and we have three finance providers to tell us how those problems can be resolved from their point of view.

Before I introduce my very distinguished panel, just a word on the theme that we are discussing – one estimate of the total infrastructure needs for Asian countries in a single year is $1.3 trillion, of which the governments and the multilateral banks are able to provide about half from their balance sheets. How do you get the other half? That’s the question this panel is trying to tackle. And let me quickly introduce the guests we have, the host country and the person perhaps extremely qualified to speak on the issue, Mr Piyush Goyal.

Mr Piyush Goyal, of course, has been already handling a lot of infrastructure, Ministries; he has been Minister of Power and Coal, and now Minister of Railways, and standing in as Minister of Finance at the moment. So, I think most qualified to talk about both Finance and Infrastructure and I must also add that Mr Goyal is a chartered accountant by profession and, therefore, already knows what kind of problems – he has been at the board of several banks – so clearly understands what kind of problems finance faces to come into infrastructure and infrastructure faces to attract finance.

We also have with us Professor Bambang Brodjonegoro, the Minister of Planning from Indonesia. He’s also handled the Ministry of Finance. So, once again, eminently capable of handling both – infrastructure and finance.

And from the financing side, let me begin with Mr Piyush Gupta, the name I confused. Mr Piyush Gupta, CEO, DBS Group, again someone who has handled both retail banking and infrastructure or commercial finance and has a long stint several years in CitiBank before he became the head of DBS.

We have Dr Hajjar, who is from the Islamic Development Bank. Dr Hajjar is both an academic and a practising financier now, so can bring to bear so many issues that academia is trying to solve and bring to the board in terms of policy making. And, of course, we have the host of this seminar, Mr Jin Liqun, I hope I got the pronunciation right, Mr Jin Liqun, who, of course, heads AIIB and therefore is coming with a lot of ideas on how we can finance infrastructure.

Q: Well, with that introduction, let me begin with the host. Mr Goyal, partly because you are, of course, best place to speak about this problem, tell us what has been India’s experience in terms of finding money and exactly what the problem is in getting private capital into infrastructure financing?

A: Well, at the outset Lata, let me welcome all the delegates who have come in from different countries to my home city of Mumbai. We are delighted to have all of you here, and I hope you have a comfortable stay and enjoy the rain, as much as Lata and I do.

I think, to my mind, infrastructure today is one of the most important and engaging subjects when it comes to planning for the future of Asia. Different estimates about what is required to be done, you did highlight the problem between the world of finance and the world of infrastructure. But it’s somewhat like a marriage, it has to be a little rocky in the beginning, it goes through its stages of maturing and once projects are in line, you have all the requisite approvals, regulatory processes in place, land, finances tied up, then it becomes a smoother ride.

And, ultimately, when the entire project is complete, then it’s joyous, because it can transform lives. And to my mind, the infrastructure story in most countries – I am sure the western world would have gone through that at some point of time and Asia today is experiencing that. We in India have seen the development of infrastructure actually transform lives, actually help us go towards meeting the aspirational goals of a billion people. And for that, what’s most critical to attract private capital or even to attract multilateral finance companies to come into India is going to be a predictable, a very stable policy regime.

It has to be simple. It has to be easy to navigate. It has to be truly long-lasting. You can’t change the rules of the game as you go along. And to my mind, something which President Jin and I discussed yesterday, integrity of processes and integrity of individuals running those processes, both sides of the table, truly will define the availability of finance.

There was a time when the entire Asian continent has gone through periods where people distrusted governments and distrusted the processes that went through the process of awarding contracts for infrastructure. Indonesia has faced that period. India has faced that period. You can’t have a situation where you have projects which have licenses, subsequently getting cancelled, leading to a lot of distress to international investors or even domestic investors.

So, you will land up facing a situation where private capital will run away if it has to be faced with the legal issues or problems subsequent to contracts being finalized. It will also take away investors and public finances. I think that has been one of the most important elements of the change that we are witnessing today, a) the change in governments and governance practices, b) also the change in the mindset of the people of the country.

There is a lot more accountability demanded. There is a lot more monitoring of the work you are doing, and there is action taken if something goes wrong – action which is decisive, action which is visible. Therefore, I don’t feel any great pressure that we will have a problem of finance when we are doing the massive roll-out of infrastructure in India in the coming years.

Different estimates are made; we believe we will need about $4.5 trillion over the next 10 years at the minimum. Important challenges will be the cost of that finance – both equity and debt. Another important challenge will be to create the availability of local resources, build up capacity to actually implement this level of projects. And I am sure with the support of organisations like the AIIB, which are bringing in very high quality standards, high integrity standards and supporting also countries like India develop these processes, I would not think that finance will be a deterrence to the creation of the infrastructure India requires.

Q: Ok. That is good to hear, if you are confident that finance will come, but yes, I think the Minister has put in the very important issues that private finance will face, especially if decisions taken are revoked by a subsequent court or by a subsequent administration. That will be the big thing that India has learned the hard way.

Well, so two or three key takeaways. One, of course, policy risk across regimes, which are natural in a democracy and brown field is more attractive to private capital than perhaps green field. But I just want to – it’s usually the role of the press to find faults in governments especially, but I must tell you that the current government has not turned over policies. I mean the land acquisition rule was a continuity.

A: Not a single one. I will respond if you give me a minute.

Q: I will in a minute, after the initial reactions. And, as will the Jan Dhan the entire edifice of Digital India is based on, the UIDAI which was started by the previous government. We didn’t try to reinvent the wheel, I think most policies – policy continuity was not an issue.

A: Since 1991, almost no policy has been changed in the Indian setup, Indian government, despite almost 8 or 10 governments coming and going. Not a single policy change, not a single effort to try and dislodge contracts already executed, save and except, a couple of occasions where irregularities were found in the process, where the courts have overturned certain decisions. But in terms of government, despite all the acrimonious politics India may have had over the last 30 years, by and large, a decision once taken by any government, the next government has only built upon that and not changed midway. Every one of them!

Q: Absolutely, I mean a whole host of right to information, right to education of the previous governments has been continued, and as Mr Goyal was saying that’s been at least a sophistication and ….. that we have achieved and I am sure that would be the experience in other democracies as well.

Q: Actually, Mr Goyal I am sure you want to respond to some of this, but also you have seen under previous governments and as your stint as a chartered accountant yourself and a bank board member, what are the learnings from PPP – Private Public Participation, in India that you perhaps may be able to share?

A: Well, couple of things before I go further. To Piyush’s point about the financing gap, my own experience is that as President Jin said that if the project is well conceived, if the risks are mitigated to a reasonable level, finance is never a problem for any good project. After all, you have a billion people aspiring for a better quality of life and there is not too many places in the world where money can be invested or profitably invested. And the Indian track record, by and large, is still a safe record for most international investors.

We have the rule of law in India, which is missing in many countries. We have a robust framework in which you have media; you have public response coming in if you don’t implement projects in time – good or bad – for and against. And I think ultimately, our track record that in 70 years of independence not a single international default – neither has the central government nor any state government, never ever defaulted in any international loan or in international commitment taken for development of infrastructure.

Similarly, no public sector enterprise has ever defaulted internationally. All of these things matter when we are going out to raise funds. I have been raising funds, for example, for the renewable energy sector earlier on, now for the railways. On every project that we have tried to raise funds, we have more people willing to invest than the amount of money we require.

For example, when the Japanese funded our bullet train project, we already have a number of agencies talking to us – when are you announcing the rest of the bullet train or the rest of the high speed train corridors so we can participate in that. After all, where else in the world are you going to have this kind of safety and this kind of aspiration of a billion people, a market of this size.

So, to my mind, I truly believe and I would like to join issue with Piyush on that, money will not be a constraint for a project in India, if as President Jin said well-conceived risks mitigated. And we have used that to good measure; let’s say in the renewable energy sector. We worked with the international investors, both private and government. So JAICA, JBEK, large investors, private equity funds, we worked with them and created that framework which gives them comfort on payments, which gives them reliability of contract over 25 years.

We roped in the state governments, central government and our own financial institutions to provide first loss guarantee or credit enhancement. So, all of this is possible. We have Mr Upendra Tripathi, who is one of those who has really led from the front the growth of the renewable energy programme and now is Director General of the International Solar Alliance.

Similarly, in the railways, to my mind, you have a sovereign rated agency now raising funds for investments in the railways, and the way we have conceptualised it, we are almost going to double the finances or the revenues of the railways over the next 7 years.

Now with that kind of capacity enhancement at an affordable price where we are using our existing assets to good measure, I think it is a very viable investment opportunity. There have been challenges and challenges in a democratic setup are going to be there. We are going to have a little bit of politics come into a project, so you want to set up a refinery in a particular place, there will be a local issue, you want to set up a nuclear plant there will be certain local  issues.

But I think that gets factored in when you look at the large business opportunity; private sector is basically entrepreneurial in nature. I have been in the private sector and we love taking these kinds of challenges and that’s where we make most money in the private sector. If it’s going to be a simple roadway and the entire route is going to be marked with roses, then the private sector is not going to make the kind of profits or returns that they are looking for.

So, to my mind, it’s important and incumbent on all governments to create that conducive environment, to work closely with both financers and the private sector, so that issues can be resolved and fast tracked. I agree with President Jin that project delays probably cost far more than the struggles we have over few basis points. But I think both are equally important, we have to start getting into the act of executing projects on time.

I will give you a simple example. In Uttar Pradesh, there was a highway that was conceptualised. It’s a almost $2 billion project……. has now got nearly 98 or 99% of the land in hand and is now doing the bidding once again. Our Chief Minister of Maharashtra, the host state, is doing the Mumbai-Nagpur freeway on the same model as President Jin said where he is involving the local population as stakeholders in the project.

In fact, Maharashtra had this model even 30 years ago, when I started my career. The Maharashtra Industrial Development Corporation would, let’s say, acquire 5 acres of land from somebody, but they would give back half an acre post the development of the entire region back to the land owner to do some service business or some activity and by that time the land value would have enhanced probably 10 or 20 times. So he would not only get paid for his whole land but get back 10% of the land where he set up a hotel or he set up some utility centre or some services, which gave him a long term sustainable income.

Very often, we are not looking for stake in the project, because that risk taking ability is not there in a poor farmer, or a poor land holder who only has a small piece of land. So if you tell him you put it in as equity but don’t get any cash in return today, it’s not going to work. You will have to do a mix of both; make him a stakeholder yet pay him upfront.

And India has now created a very robust framework where land acquisition is not so much a challenge. There is a lot of politics in many of our projects, but that’s very often different from what is visible on the streets and what is the reality behind curtain. Because everybody wants development in the country and ultimately beyond a stage when you oppose development, the people tend to give it back to you in the next election.

So, I think a robust democratic framework which we have in India is really the strength which empowers me to say that money is safe in India, the rule of law prevails and I still believe Piyushji that I have never seen money as a constraint for a good project. It may be a constraint when you are trying to literally do something which is at a zero RoR, or a very low RoR, in which case the government in India now steps in with viability gap funding, hybrid annuity models, different models by which we bring up the rate of return and make the project attractive.

Q: Maybe one project has coordination officer for every project.

A: Easier said than done, there are different agencies involved. We have the single window system in many states in many central projects. In fact, Prime Minister Modi has a very unique method by which he conducts on every last Wednesday of the month a programme called ‘Pragati’ where he himself directly video-connects with all the 29 state Chief Secretaries and the administrators of all the Union Territories, and a bouquet of projects is taken up for consideration and discussion, which also come from bottom-up.

So people push up to the Prime Minister’s office what are the challenges they are facing in different projects. So, let’s say I have the bullet train going on, and you are all aware that there is a little challenge we are having on small piece of land through the acquisition cycle. So that went through a Pragati engagement where both the State Chief Secretaries made time-bound commitments and discussed the process and the challenges they were facing.

So this is the kind of direct interface, so you have a situation here, forget the project officer – the Prime Minister is willing to become the project officer to kick-start and expedite projects.

Q: Will you buy it?  If they come with a cross default clause?

A: Well, I think both are right in different projects. I fully agree with President Jin that we cannot have MDBs getting into very high risk projects and defaulting. They are ultimately going back to the sovereign, it more the sovereigns who are the principal promoters or financers. And the day we will have MDBs failing or even a single MDB having a stress on their balance sheet, it will actually shake the international financial system very badly. So we will have to continue to have the MDBs who provide relatively lower cost financing, focus on very strong projects, very often insisting on sovereign guarantees or very safe projects. And all of us must collectively try and strengthen their balance sheet and strengthen the future. They have a big role to play in the international financing.

Q: If they say that I am providing 10% and the private sector is providing 40%?

A: I will come to the first clause. I think it very much depends on the nature of project and the country we are dealing with. You rightly said that India has a very robust framework on inflation control and the fiscal responsibility. In fact, even when this was not there, if you look at the last 27 years, post 1991, Indian rupee has not depreciated more than 3 or 3.1% CAGR over the last 27 years.

So we may have had certain ebbs and dips and stuff like that, but by and large, in the long term, we have been a very stable currency and a stable country to invest in. And, possibly that encourages me to think in terms of whether the sovereign as Mr Gupta rightly said should engage with some kind of a comfort to investors on foreign currency long term risks. We actually could consider doing that; it’s not a bad idea at all. The sovereign could provide some kind of a backstop on currency risks, knowing full well that a 27-year experience and now with even more robust processes in place, we are at a fairly safe wicket there.

In fact, if you see the Indian currency; 2013, we were Rs 68 to a dollar. We borrowed $32 billion through FCNRB accounts, brought that down to 62-63, which is when we came in. We repaid that entire $32 billion and we are still only at 67-68. So if you see a 5-year period, there’s been almost no depreciation, having paid back that $32 billion that temporarily helped to bring down the dollar rates.

So, I think the safety and comfort of a country risk is getting more and more defined over the last few years. As regards the small projects, I don’t think the MDBs can really engage directly, they don’t even have the bandwidth. So it will have to be, as President Jin said, through multi-layering of their investments, but ensuring that there are robust processes at the second layer, which will then go into smaller projects.

And as regards the first loss, it’s a very-very robust financing mechanism. I support that mechanism, but who should be doing it is a question mark. The first loss mechanism worked in the wind sector, because there is no OPEX. It’s a completely CAPEX driven project, where you have a defined amount of electricity being generated. Most countries have created a robust framework where renewable energy is a must purchase item.

So the risks are already mitigated in the regulatory framework, their taking of first loss risk helps to bring down the cost of the project, bring down the interest cost in the long run, and keep projects like wind or solar at a reasonable price, but a road project. Ultimately, you are only doing a projection of the traffic and the risks are certainly larger, so there one will have to see whether governments can provide that first loss. But I don’t know whether banks or multi-lateral agencies can provide…..

Q: No. My point was that banks may come in private sector if multi-lateral agencies took the first loss?

A: I think the governments will have to take it, because it’s very country-specific. So you have 86 governments participating in the AIIB for example, but the lending is not necessarily equally distributed. Now that would actually become a deterrent for many countries who may think that, well, if AIIB is investing very largely in country X and the investors at the base level they will think that country X has a higher risk profile then that will deter investment profile.

Q: Okay, that might disturb the entire multi-lateral game altogether.

A: A thought came to my mind, which President Jin may like to consider. We could actually look at institutions like AIIB creating subsets where the local government, some multi-lateral agencies and possibly even some private players could pool capital which will create the first loss…. it’s like an insurance pool and may be get a larger return on their investment. So we could look at some such engagement.

A: I can briefly say one thing that today, the country is looking at greater engagement with innovation. In fact, my Chief Minister of Maharashtra was in the silicon valley barely a week ago talking to companies over there in what new technologies, and he actually visited even the hyper-loop facility, which no other country in the world has as yet decided to use or implement.

Look at India’s example on the LED programme, for example, while other countries are still discussing about energy efficiency and climate change and what they would do to protect the planet, India quickly embarked on the LED programme. And in barely three years, today we are an almost 100% LED country and we have been able to drive down prices by about 87%, because of which the whole world is benefitting.

Anywhere in the United States or Europe when I go, they compliment us for the great thrust in LEDs. India has saved about $6.5 billion on consumer electricity bills annually for an investment as low as a billion to $1.2 billion. So, that’s the kind of benefit innovation can get even to an emerging economy. In fact, Prime Minister Modi is going to be coming in tomorrow for inaugurating the board of Governors’ meeting, and soon after that, he’s engaging with Indian corporates in a closed door where the issue we are discussing is what can we do to bring R&D spends to India, to bring innovation to India. Largely, that’s the agenda of the meeting.

So I think we have a huge appetite in India and the people of India want to engage with more and more innovation. Look at what’s happened to the data world, India has become one of the world’s largest consumers of data in a short span of 2 or 3 years. So, we believe very strongly that there is huge potential of a billion people. We are not looking at going up the development curve in stages. Look at electric vehicles; we want to just leapfrog getting into the electric vehicles phase, rather than every Indian first owning a petrol car and then changing to an electric car. So, I would welcome any initiatives on that.


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