Ya'll Nibbiars
VI, in many ways, represents what is wrong with infrastructure policy and public discourse in India. For starters, the three key decision-making stakeholders in this drama the government that makes policy and regulates the sector, the markets that invest and operate these projects, and the judiciary that adjudicates its disputes and litigation have had little understanding of the nature of the infrastructure beast. Irrational exuberance, unrealistic expectations, maximisation of fiscal interests overriding public policy, deep suspicion, and poor institutional understanding or respect for each other’s roles and boundaries besides the ubiquitous rent-seeking that plagues India’s political economy have wreaked havoc in investments and confidence across its sectors. Two, in particular, telecom and power, stand out. The and But before diving into its troubles, a quick review of what makes infrastructure so different. Infrastructure, by definition, is a foundation asset that helps create productive capital assets and facilitates economic activity and growth Power for factories and lighting for education, roads for transport of goods and commuting, telecom for business and personal communication/ data/ information etc. It is characterised by spatial networks interlinked highways, telecom towers, power lines etc. and, often, as a result, involves large and lumpy capital investments with monopoly and pre-emptive aspects to its projects. They are also public goods, with significant public interaction and interest, and are therefore highly regulated across economies. The And Most infrastructure policy, however, is a legacy from an earlier stable Keynesian era when technology was not a key disruptor of the sector. This stability and technological non-disruption of these foundation sectors enabled planned, large-scale private investment projects with adequate regulation and assurance of capital recovery and reasonable returns, over long frameworks of time the estimated economic life of the infrastructure project.
This stability has however been turned on its head, with successive waves of technological disruption buffeting key infrastructure sectors in the span of less than a decade. In energy, there has been large-scale disruption by first, wind, and now solar and its multiple variants. In telecom, first the battle between GSM and CDMA, and subsequently between various next-generation G technologies. Each of these has involved huge outlays for each commercial-scale wave of sector technology, and enormous destruction of capital which has sent shockwaves into the financial sector and economy, even as the market battles have raged. The India’s liberalisation in the 1990s, after years of stifling socialist policy, saw an almost fervent belief in the theory of markets as the panacea to all economic ailments. Competition, lower prices, raising and more efficient allocation of capital have held true for the most—or some—part of their promise. Except to a lesser extent in infrastructure.
The In telecom, the exuberance of liberalisation combined with cynical expectations of the workings of the political economy saw unrealistic projections and bids by market players for the multiple rounds of the spectrum a public good being auctioned. A key determinant parameter of which was based on the percentage of revenue sharing with the government. The story of what followed in the telecom sector is too well known to repeat. What however stood out was the government’s insistence on immediate receipt of both its revenue share and dogged and litigated interpretation of contract, even as the technology rapidly changed and the battle was largely lost by the earlier players, of which VI was an amalgam, and the sector hurtled towards crisis. This even as a new entrant with superior 4G technology undertook a large scale roll out and undercut pricing in a market share bloodbath. By the time the government realised its larger, public policy role of the orderly long term development of the sector and the need to prevent concentration of duopoly market power and also that a higher revenue share of a dead horse would still be dead it was too late. Its belated attempt to defer recovery of its earlier litigated revenue sharing based on a dying technology, to give breathing space to VI as the third player, was dashed by the judiciary. Which brings us to the present. An ailing VI, among the last of the early risk-takers in the telecom revolution, now stands at a crossroads. Its funding requirements are huge, by some accounts requiring fresh investments of Rs.70,000 crore. Its subscriber base is based mostly on old technology, and is deserting in droves. Half measures and band-aids won’t help. A decision has to be taken by the government as the custodian of public policy, based on what it perceives as public interest. A dead market horse serves neither the fiscal interests of a government seeking fulfilment of contractual obligations of what may soon be a non-existent higher revenue share, nor the public interest obligations of a widely perceived to be overstepping into executive policy domain – deeply-suspicious-of-rescue-attempts judiciary.
It is important here to distinguish the company and the purpose of its existence and economic activity, from its shareholders. The shareholders took the risk, they lost, and therefore their financial interests as owners can be extinguished. Again, if there are any doubts or suspicions against previous management, a forensic audit can be undertaken. But the company is a distinct entity serving multiple stakeholders, including a critical one of public policy in a critical sector. One possible option may be for the company to be taken over by a new set of investors at a price at which a reasonable return can be expected on their fresh investment to help upgrade technology and sustain in the marketplace, and with a level of debt that can be serviced. The balance can be converted into subordinated obligations that would be paid over time as and when the hopefully improved cash flows of the firm as a now renewed going entity, permit. The sacrifice would be required both on past AGR dues, as perhaps also by its lenders. A less than ideal outcome. But perhaps significantly better than allowing the problem to endlessly fester even as the market’s horse and everybody’s stakeholder value bleeds to death. The and Public policy in infrastructure in an emerging economy like India cannot continue to be outsourced to a blind belief in the overarching sole wisdom of markets or their ability to single handedly absorb large and disrupted costs, as wreckage across sectors shows. It is critical that all key stakeholders in infrastructure understand its unique characteristics and their respective responsibilities and self circumscribed powers to enable its development in public interest. A holistic approach with deeper understanding and clearly demarcated roles would go a long way in ensuring continued private investment in this key determinant sector of future economic growth in these turbulently disruptive times.