Impact Audit/Opinion : Jump-Starting Investments in Infrastructure

The Government must establish an “Impact Audit” Department that will assess the impact of the expenditures. This will enable the Government to close the taps of ineffective programmes and improve the quality of its expenditures

The Government has established a National Investment and Infrastructure Fund (NIIF) to jump-start investments in the infrastructure sector. The Government will contribute Rs 20k crore towards the initial capital. It is hoped that the fund will be able to attract another Rs 20k crore of investment from the market thus doubling the money available for lending. The fund will invest in share capital or give loans to commercially viable infrastructure projects.
The catch lies in the term “commercially viable.” Large numbers of projects have become commercially unviable. As per one report, the infrastructure sector is doing very poorly. Our banking sector is groaning under the dead weight of this sector. The Non Performing Assets (NPAs) of the banks constituted about 16 per cent of the loans given out by them. However, the infrastructure sector is contributing 30 per cent to the growth of NPAs. The infrastructure sector is under much greater stress than the other sectors. Why would investors put their money in a fund aimed at increasing investments in a stressed sector? That would be like betting on a sick race horse.

Investment in infrastructure will increase only when the underlying problems will be sorted out. The main problem is padding of expenses by infrastructure companies. Take the example of the Srinagar Hydroelectric Project. The project was approved by the Central Electricity Authority with a capital cost of Rs 1,800 crore. The project proponent increased the cost gradually to Rs 5,300 crore while the capacity remained unchanged. Money was bled from the accounts of the company. Actual investment was less while the burden of loan increased. As a result the loan became NPA. The anxiety on the part of the Government to encourage private businessmen to invest in infrastructure has led to the regulators such as the Central Electricity Authority and Electricity Regulatory Commissions look the other way at such misdoings that have boomeranged. The misdoings have led to the loans becoming NPAs and now the investors are shunning the entire infrastructure sector.
In this situation, increasing investments in infrastructure sector requires action at two levels. One, the infrastructure projects have to be made bankable. The padding of accounts and bleeding of companies has to stop. The Government must institute a thorough audit of all stressed infrastructure accounts and recover the money that has been bled by the promoters. That will bring down the capital cost of the projects and make the companies profitable. New investments will flow once investors see that existing companies are making profits.
The second level of action is at making the money available for investments. The problem is that the Government itself is not able to invest monies in this sector. The quality of government expenditures remains poor. The Government continues to spend large amounts on consumption such as paying hefty salaries to the Government Servants. Corruption too remains rampant at operational level.
The Government can also take the following steps to improve the quality of Government expenditures. A separate proactive vigilance system should be established to trap corrupt officials. The present system of Central Vigilance Commissioner comes into operation only when a complaint is made. Most corruption is undertaken with the consent of both parties. This does not come under the scrutiny of these vigilance organisations. Kautilya had advised the King to establish a spy system to trap corrupt officials and another spy system to trap the corrupt among the spies.
The present Government audit system examines whether the money has been spent correctly. But it does not examine whether the expenditures have led to the targeted results. For example, audit of a health department will examine whether the drugs have been bought after following a proper tendering process. The audit will not examine whether health of the people in the catchment of a Primary Health Centre has improved. The Government must establish an “Impact Audit” Department that will assess the impacts of the expenditures. This will enable the Government to close the taps of ineffective programmes and improve the quality of its expenditures.
The Government must itself make more money available for investment in the infrastructure sector. An increase in Government investment will provide confidence to private investors to follow suit. The proposed increase of salaries of Government Servants goes in the opposite direction. It gives a message that the Government will continue to squander its monies in consumption. The investors will hardly make investments in this situation. But the stranglehold of Government servants on the politicians is so complete that no politician is in a position to deny them increase in salary. One way out of the impasse is to provide the increased salaries due to the Seventh Pay Commission in form of long term bonds. The Government could even give out the increases in form of shares of the NIIF. It will be like a deferred payment of salaries. This will reduce the immediate financial burden on the Government. The money could then be used for investments.
The Government should make strategic sale of PSUs as was done under NDA-I. The present policy of raising monies by selling minority shares in the PSUs will not go far because the money that can be raised by selling minority stake is much less than that can be raised by selling the majority stake. Secondly, the management remains with the Government in the sale of minority stake. The basic problem of inefficiency, nepotism, overstaffing and corruption in the PSUs remains intact. The existing PSUs like the State Bank of India should be privatised and the money should be used to make Bullet Trains.
The Government must realise that the global economic environment is hugely negative. It will be nearly impossible to attract foreign investment in NIIF or other infrastructure projects. The only solution is to set one’s own house in order and redirect national resources to investment. Foreign investment will only follow if Bharat puts her own money in the infrastructure sector.
Dr Bharat Jhunjhunwala( The writer is  former Professor of Economics at IIM Bengaluru )