India needs $100 billion infrastructure investment every year: A M Naik

A M Naik, chairman and managing director, L&T, says the infrastructure sector needs at least $100 billion in investments every year. ''The government's proposed Rs50,000 crore fund will not help the infrastructure industry as it will help only two or three big projects. So, a lot more is needed. We hope the changes at the finance ministry do not slowdown the relief process."

According to him, most infrastructure projects are not being financially closed at present as the private sector is finding it tough to close projects financially and over 300 projects were waiting to take off.  "Under this scenario, only sovereign guaranteed projects will work," said Naik, adding "so, projects should be channelised via such an agency." 

He feels the construction industry should be given tax breaks.

The 11th Plan, he said, may only see 60 per cent tp 65 per cent of the proposals being implemented. 

CNBC-TV18 shares with domain-b its exclusive interview with Naik:

What are your expectations of the contours of any such likely fiscal stimulus package

Whatever maybe declared, it will be absolutely inadequate, because for decades India has ignored building infrastructure. For more than two-three years, I have been saying that it USD 100 billion per year should be spent. For 10 years, it would be USD 1 trillion or about Rs 500,000 crore. At the current rate, Rs 50,000 crore (the proposed stimulus fund) cannot even do more than 3-4 projects, each project being USD 1-2 billion. 

So, a lot more will have to be done, but anyway it is a beginning. We will have to constantly follow through to see that more and more importance is given to infrastructure and is basically funded through the government's Infrastructure Finance Corporation. Today, a majority of infrastructure and power projects are not financially closed because of liquidity issues worldwide and lack of interest today in investing. Everyone today wants to hold cash to protect themselves. 

In such situations, only sovereign guarantee projects are financially closable. Project finance is very difficult to come by. Therefore, most money should be channelized through an agency which has the government's sovereign guarantee. That is the first thing.

Secondly, you must give long-term tax breaks on all infrastructure projects. In construction, the developer gets the tax break today, but the construction industry doesn't. 

Consequently, profitability of all construction companies is very poor. If you look at balance sheets, it will get worse as the number of projects are more or less coming down rapidly. I think we need to do much more than what you and I have in mind.

Along with the liquidity problems, the expectation was that the government would stand up and raise its hand that there would be a greater thrust towards public infrastructure, greater spend allocated to that direction, do you expect that to fructify over the next six months?

I would say Rs 50,000 crore is all that will come by and that will be too little. As I just said Rs 50,000 crore can hardly fund 4-5 projects. We have more than 300 projects right now, between power, road, and infrastructure, which are kind of waiting to take off. 

If they can only expedite those which are government-sponsored and public-private partnership financing. Only funding coming through Infrastructure Finance Corporation, which have sovereign guarantees, can take off. 

But there are lots and lots of projects which have not taken off. They are all on the table in various public sector organizations or with the government directly but are not moving fast enough. They have to be moved so that the infrastructure builds. Obviously, public-private partnership and sovereign guarantee financing have to be encouraged with tax breaks, otherwise project finance looks difficult. In any case, Rs 50,000 crore is too little.

We have had some fairly disappointing manufacturing and Index of Industrial Production (IIP) data coming out these past few months and for many sectors of the industry demand almost fell off a cliff in October. Is there fear that it might happen for the capital good space as well, specifically on the private order side?

Yes, the situation is not that bullish as it was some months ago. With a glut in cement, new capacity creation will slowdown, just as in the steel sector. So, obviously the spend in some of these sectors will come down. Therefore, capital goods in the medium-term will get affected.

It is another story that some companies have built a very good export kind of capabilities, which will continue to do well. They have been exporting more than half of their produce. Through the glooming world economy, there is still a market for high-tech products. L&T is depending only 30-40% on the Indian market and more than half on the foreign market. If you look at the manufacturing sector, because it comes under the core sector, capital goods basically means the core of almost all the manufacturing. If manufacturing slows down, obviously capital goods does slow down, and to that extent it is slowing down.

You have seen many elections in India as well. Just want to ask your perspective on what you expect in the next six-eight months regardless of any fiscal stimulus package or government spending on infrastructure projects. Does it typically come to some kind of standstill around election time for a few months?

Normally, the process does slow down. But with the unfortunate meltdown of the world economy and its effects on India and the Indian economy itself having taken a knock, I suppose that it has slowed down enough. Possibly it won't be like every other election that is what we can hope for. If they declare lots of new projects in infrastructure and some tax breaks to stimulate the economy, that's something which is almost there and not there at this stage. The intentions of the government were very good. They did something, a lot more was supposed to be done. Now, you had this terrible tragedy in Mumbai because of which the government is now busy taking stock of that situation, its after effects, and consequently the Finance Minister has now taken over the Home Ministry. 

I hope that doesn't slowdown the process because a lot of blueprints were ready for release including this Rs 50,000 crore infrastructure announcements.

I heard you say a while back that a lot of projects have gone on extremely slow mode, and some are not going in for completion, could you specify what kind of projects, in which areas, and are these pure government-sponsored projects that you were alluding to?

There are three kinds of projects. One is government spend. Majority of those projects take too long. For example, National Hydro-Power Corporation has many projects. The tenders of these projects take two years to decide. 

NTPC has lots of projects. They are supposed to order around 17 power stations; 11 projects of 660 mw each and another 7-8 projects of 800 mw each. This bulk purchasing has been under discussion for more than two years. It is still at least six months away before it will be awarded.

All this could be expedited as power is the need of the hour. The private sector which is the earlier IPPs, or independent power producers, have slowed down their investments. So, the capacity which was to be added in 11th Plan is not going to happen one more time. Normally, you say 100 and you achieve 55-60 that had been our track record for the last several Five Year plans. 

We thought that we will dramatically improve that track record and enhance capacity by more like 80% of the plan, but with the current situation maybe it will be 60-65%, maybe 10-15% better than before. But even the 11th Plan will not see the same kind of achievement as we have planned. 

Even NTPC has not come up with those decisions. The tender is just going to be out in December, which had been supposedly out for last several months. Then, they will take four-five months to decide and that is a story almost everywhere. Whether it is freight corridor, it could be expedited a lot. Likewise, I can make a long list of projects which are purely in the government sector. I have it ready for action. This could be compressed by 3-6 months to spur infrastructure as these are government spent and have no problem of finance as budgets are provided for.

The second is pure private sector. They find it very difficult today to financially close any project on a project finance basis. They are the ones who should get financing from the Infrastructure Finance Corporation, with a sovereign guarantee, for some of those to close. Then, you have more than 50 projects waiting for more than a year now. The year has all gone on qualification of even a thing like road projects. Even road projects need foreign partners and so on, which we have done for donkey's years. We have lost a year and year-and-a-half in new guidelines which were set out by the Planning Commission. 

So, those can be expedited obviously as they are public-private partnership projects and some of them are national highway government-funded projects. But sector by sector, I strongly urge that we should list out projects in public private partnership, government, and pure private sector to various agencies and see what can be done to move them forward. 

You have seen many cycles for your industry. Given the current credit and growth concerns, how much worse do you think this infrastructure development problem is going to get? Where do you think it might lead? Will the executable period get extended a whole lot or we might be dealing with a standstill situation for some quarters?

Would say that we may have a difficult time for the next two years. The fact that the whole world economy is going to go slow because funds which come from all over the world has to move everywhere. Also, investment and lending has to come to various projects. So, I expect there will be some slowdown for two years, but work will not come to a standstill.

The effect on India will not be as bad as possibly for the rest of the developed nations. I expect that if we take fast actions on what I said, then the Indian economy even next year can grow to around 6.5-7%.