The Hindu Business Line : Jaswant's new arithmetic

A professional approach, which involves all the financial institutions and banks and an understanding regulator, is the key to the success of the budgetary arithmetic that the Finance Minister has designed.

MR JASWANT Singh's Budget has received both bouquets and brickbats, more of the former than the latter. While the giveaways have rightly excited interest of those benefited, concern has been expressed over the size of the fiscal deficit. While many have congratulated the Finance Minister on his daring decisions to increase investments, Dr Manmohan Singh has raised a question where exactly the Rs 60,000 crore proposed by Mr Jaswant Singh figures in the Budget. Mr Jaswant Singh has provided for this large investment on roads, Railways and other infrastructure, including ports, in a transparent manner and adopting a innovative mode of financing, which he has explained in the Budget.

The secret of the budgetary arithmetic lies in its resort to a new paradigm of public-private partnership, which leverages a comparatively small amount of public contribution to raise the necessary funds for large investment.

The Finance Minister has put forward the idea of public-private partnership, which will undertake the new investment on a "Build-Operate-Transfer" basis, with a viability subsidy to bridge likely gaps in viability where the expected returns fall short of levels needed to sustain to pay back. A bold and innovative initiative, which marries the abundant liquidity in the Indian financial system with the needs of public investment!

Before one gets into the details of Mr Jaswant Singh's attempt to privatise public investment, one has to see what are the preconditions for the success of this venture. This model has apparently its inspiration in Chinese experience, where a number of local bodies and State governments have undertaken large infrastructure projects drawing finance from China's banking system. It also draws support from the respected academic, Dr S. L. Shetty's suggestion in this regard.

The financial institutions and banks have been accorded an important role in this new model of financing the infrastructure. It also needs close association of the State governments, local bodies and consumers of services in the formulation of financing plan, which will include collection of adequate tariffs. The Finance Minister has abjured warrantees being provided by the Government. The security is obviously the project itself. The success of the proposed model depends critically on the dedication, energy and application of the financial institutions, which unfortunately seem to have abandoned emphasis on long-term financing in their current pursuit of retail lending. Their Dharma is to nurse and take care of long-term financing needs of the economy. The drive towards universal banking has meant that the long-term financial institutions as such have been orphaned.

If the Budget arithmetic has to be realised, the Finance Ministry has to reinculcate the mission of long-term funding in the institutional bureaucracy of the financial sector at all levels. This needs a change of mindset. The financial institutions are left very much to themselves. The only way Mr Jaswant Singh's thrust towards infrastructure financing by India's financial sector can be realised may be by giving such financing the status of priority sector. Unless this is done, the objective of investment of the order of Rs 60,000 crore cannot be reached. The ambitious target of the Budget covers various important infrastructural areas, such as roads, railways, ports, airports and power. One of the essential ingredients of success of the new model of financing would be an insistence on levy of appropriate user charges by consumers of the services provided by the new infrastructure.

There have been cases where projects have come to a sad end because of the inability, for various political reasons, to levy user charges, such as tolls in the case of bridges. This can be avoided by involving the local government and the consumer community in the evolution of concession agreement well before financing starts.

While private participants in the proposed public-private partnership bear part of the risk, the responsibility for levy and collection of user charges rests primarily with the public half of the partnership. There needs to be a careful and steady nurturing of a new mindset that "there is no free lunch" in the provision of infrastructure and that infrastructure can be created only when it can pay for itself. In a post-Budget interview, Mr Jaswant Singh had conspicuously commented on what he called the `C (3)' factor, which hinders quick decisions in Government. He was referring, in particular, to the slowdown in Defence expenditure, which has led to a large surrender of appropriation. Significantly, the Finance Minister had mentioned as components of the `C (3)' factor — the CVC (Central Vigilance Commissioner), the CAG (Comptroller and Auditor General), and the CBI (Central Bureau of Investigation). The Finance Minister will accept that the `C (3)' comprises three Holy cows in the lexicon of our governance. The Finance Minister has, however, put his finger on the root of public sector delays and deficiencies.

While it is difficult to deny these factors their important role in avoiding fraud, it is important to ensure that there is a safety net for those who take bona fide decisions in the public sector. The Finance Minister himself has realised that the `C (3)' factor places a crippling constraint on the functioning of the public sector. The least that one can request the Finance Minister is to give a protective cover to those financial executives who take decisions on infrastructure financing.

Over-emphasis on protecting oneself through extensive note writing can only lead to bureaucratisation of decision-making in regard to investments. There has to be a mindset change not only amongst the financial institutions, but also among components of `C (3)' factor. While fraud should not be allowed, the `C (3)' factor should be involved in an educational process to ensure that quick decision-making is not considered a target of suspicion.

A detailed look at the new investments in the Budget will give us an idea of the magnitude of financial planning and the involvement of FIs — new road projects at an estimated cost of around Rs 40,000 crore, National Rail Yojana Project costing Rs 8,000 crore, renovation and modernisation of two airports and two sea ports at an estimated cost of Rs 11,000 crore and Global Standards Convention Centres at an estimated cost of Rs 1,000 crore. Mr Jaswant Singh is effectively counting on extra budgetary resources of the order of Rs 60,000 core through these ventures. In addition, he proposes to finance the North-South and East-West corridors by an additional levy of 50 paise per litre for diesel and motor spirit and contribute to the Rs 60,000 crore.

Public-private partnership cannot come about by mere mention in the Budget speech. To attract private investment is not easy, especially given the fragile state of the stock market and the uncertainty of return of infrastructure projects. We may need to interest foreign investor, especially multinational firms which have sufficient expertise in these projects, but they have still to forget Dabhol. Cleaning up the Dabhol mess is critical for the success of Mr Jaswant Singh's new model of infrastructure investment. A professional approach, which involves all the financial institutions and banks and an understanding regulator, is the key to the success of the budgetary arithmetic that the Finance Minister has designed.

There is an important macro-economic spill over of the Jaswant Singh paradigm. Had he provided the entire implemental outline directly in the plan, fiscal deficit would have gone totally haywire. The financial innovation, the Minister has designed, is elegant, in that it has reduced exposure of the public sector as government qua government, but transferred it to the financial sector which includes the public sector in a large measure. The Finance Minister's innovative Budget calls for innovative approaches on the part of financial institutions. The innovative ways of financing which the Finance Minister has adopted deserves full support by all observers and above all by the financial institutions and all those concerned with infrastructure investment.

One unanswered question, however, is how the financial institutions will access the requisite long-term funds at affordable rates. This is a challenge for our financial regulators and policy-makers. Perhaps, the RBI can and will find ways to ease the financial institutions' access to long-term funds. On the success of this innovation depends the success of the budgetary arithmetic of Mr Jaswant Singh.

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