Multilateral Development Banks – Future Role and Funding Strategies

Multilateral Development Banks (MDBs) are financial institutions that provide financial and technical assistance to developing countries. These banks are owned and funded by multiple member countries and operate on a multilateral basis, hence the name "Multilateral." MDBs play a crucial role in supporting economic and social development initiatives in developing nations. They provide funding for various projects and programmes aimed at reducing poverty, promoting sustainable development, and improving infrastructure and public services.

 Multilateral banks played a key role in the growth of developing economies by reducing of poverty and creating robust government administrative systems. With the help of Multilateral Development Banks many developing countries were able to accelerate the economic growth of their country and reduce the poverty.

We are living in the of world digital economy.
Environment management and Climate change is one of the major issues of focus and countries all over the world are looking at reducing the pollution and implementing environmental friendly Industrial Development strategies.

 

A few areas ,where MDB’s can focus for their scope of operations include :

 Climate Change and Sustainable Development: Given the urgency of addressing climate change, MDBs can play a pivotal role in supporting sustainable development by significantly scaling up their investments in renewable energy, climate adaptation, and sustainable infrastructure projects. They can act as catalysts for mobilizing private capital towards climate solutions, promoting green technologies, and integrating climate considerations into all aspects of their operations.

 

Social Inclusion and Equality: MDBs can prioritize social inclusion and equality in their development agenda. This involves actively addressing gender disparities, promoting inclusive growth, and supporting projects that enhance access to education, healthcare, and basic services for marginalized communities. MDBs can also encourage governments and borrowers to adopt policies that promote equitable development outcomes.

 

Digital Transformation: Embracing digital technologies and leveraging them to support economic development and financial inclusion is another area for MDBs to reimagine their role. They can support projects that foster digital connectivity, expand access to digital financial services, and promote digital literacy. By partnering with technology companies and promoting innovation, MDBs can help bridge the digital divide and unlock the potential of the digital economy.

Private Sector Engagement: MDBs can enhance their collaboration with the private sector to maximize development impact. This can be achieved by fostering public-private partnerships, supporting entrepreneurship and small and medium-sized enterprises (SMEs), and providing technical assistance and financial products tailored to the needs of the private sector. MDBs can also promote responsible business practices and environmental and social safeguards in private sector investments.

 

Crisis Response and Resilience Building: MDBs can play a more proactive role in crisis response and building resilience, particularly in the face of pandemics, natural disasters, and conflicts. They can provide rapid financing mechanisms, technical expertise, and policy advice to help countries prepare for and recover from crises. MDBs can also support investments in resilient infrastructure and social safety nets to strengthen countries' ability to withstand shocks.

 

Knowledge Sharing and Capacity Building: MDBs can prioritize knowledge sharing, capacity building, and peer learning among their member countries. They can establish platforms for sharing best practices, facilitate policy dialogues, and provide technical assistance to strengthen institutional capacity and governance frameworks. By fostering knowledge exchange, MDBs can amplify the impact of their interventions and promote sustainable development practices.

 The G20 meetings of this year have focussed  on setting new priorities for multilateral Development Banks, redefining their scope of operations and explore new funding stratgies.

The Multilateral Development Banks so far were dependent on funding from leading developed  countries in the world and raising funds through bonds. Looking at the challenges before the world today, the funding by these banks are not adequate to meet the emerging fund requirements.

In this context, a working group has been created and the first draft report was presented during the G20 meeting in July 23. The final report will be submitted in the September G20 meetings to be held.

The first part of the Singh-Summers report suggested the need to increase MDBs’ annual spending by $3 trillion by 2030, including $1.8 trillion for additional climate action and $1.2 trillion for achieving other sustainable development goals (SDGs).

 

India’s Finance Minister outlined the four-fold agenda of India's G20 presidency, which includes the following objectives:

Enhancing the agility of multilateral development banks (MDBs) to tackle 21st-century challenges.

Ensuring prompt resolution of debt and debt-related matters.

Establishing a global regulatory framework for crypto assets beyond central bank jurisdiction.

Expanding digital infrastructure to meet growing demands.

US Treasury Secretary has called for reforms that make multilateral development banks "better..not just bigger" and sought certain reforms before a capital hike for these institutions. She listed out a few priorities to reform multilateral developments banks such as a framework for targeted use of concessional financing for global challenges, the option for the World Bank to lend to sub-sovereign and supra-sovereign entities such as COVAX to address global challenges, and streamlining the climate finance architecture to make sure development banks and specialised funds work together to deliver maximum impact.

US Secretary said she was pleased with the Summers-Singh report's emphasis on incorporating global public goods into the mandates of multilateral development banks and its focus on making these institutions' operating model more responsive through changes to culture, incentives, and risk appetite. She also shared the call for much more ambitious private sector engagement and efforts to make the whole system work better together. She supported  the request for swift implementation of the Capital Adequacy Framework recommendations," she added.

Commenting on the steps being undertaken by the World Bank, She said efficiency improvements and balance sheet reforms will "responsibly unlock" $50 billion in additional lending capacity over the next decade. Further, she said the multilateral development banks system could unlock $200 billion over the next decade from the measures already being implemented or under deliberation. There is potential for even more if the MDBs (multilateral development banks) undertake some of the longer-term and more complex recommendations in the G20 Capital Adequacy Framework report. This is $200 billion more in funding that we can use to advance key global priorities: spurring economic growth and reducing poverty, fighting climate change, and promoting human development," Yellen said.

Considering the vast amount required for implementing Climate management Strategies  and Health Management, There is a need to look at innovative Financing strategies. Multilateral Development Banks have got lot of strengths which can be leveraged to achieve the desired goals. Apart from Financial Capital, they also have lot of Knowledge Capital and Relationship capital across most of the countries in the world. They can play a vital role in acting as  Platforms for facilitating  Climate action Goals, Health and Digital Penetration. By working very closely  with IMF, Other Multilateral Banks, NGOs/Charitable Organisations, Governments and Private sector,  they can facilitate the implementation of Political and Economic reforms .

The Multilateral Banks have  so far were giving  Grants and Long term soft loans to the Central and State Governments of  the developing countries. The funds were given for Urban Development , Rural development, Agriculture development, Health, Education sector and Poverty Alleviation schemes. Infrastructure is one  sector where  lot of funds were deployed. They also helped the countries to achieve reforms in the Public Utilities and Public Administration.

The Subsidiaries of MDB’s focussed on Private Sector,  were helping the private sector in the form of a both loan and equity. But they were on a small scale compared to their concessional funding. This aspect, has to get a higher focus in the future strategy of MDB’s.

As mentioned in the First draft report of G20, Quantum of funds required to meet the future challenges, even if capital base is  increased and the present balance sheet is leveraged to the full extent, Multilateral Banks with the enhanced fund position  will not be able to meet the Challenges. There is a need for extensive collaboration with Private sector, NGOs , Charitable Organisation, Sovereign wealth funds, Leading companies in every country and the Leading fund managers across the world.

To adopt innovative financing strategies, MDB’s have to  create Special subsidiaries for Climate Finance, Telecom infrastructure / digital infrastructure , Health/Education. This will help to create strategic alliances with the leading Stakeholders. The MDB’s , which do not have subsidiaries for private sector development, can develop a subsidiary for funding the private sector.

The security regulatory Authority of India has mandated the leading Profit Making companies to contribute 2% of a net profit towards Corporate Social Responsibility. Similar regulation can be brought in all the countries in the world. Part of Funds collected could be given as a Grant or Equity to  Multilateral Development Banks to fund the specific Initiatives including Climate Initiatives.

The Leading Sovereign wealth funds and NGOs/Charitable Organisation  in the world have billions of dollars in their Kitty. There could be requested to give Grant/Equity towards climate Finance and poverty reduction initiatives. They can also benefit deploying the funds through MDB network , the infrastructure available with MDBs for their specified purposes.

The leading Information Technology companies in the world and Telecom companies  can be requested to provide grant and Equity towards Education and the digital infrastructure initiative.

The leading Pharma Companies and Medical Devices companies can be roped in for funding the Healthcare Initiatives.

European Bank for reconstruction development has a unique business model where they focus on funding the private sector. They work very Closely with the governments in effecting political and economic reforms. The private funding arm of multilateral Development Banks can develop business model like EBRD and help introducing political and economic reforms in the developing countries. Many of the developing countries have rich natural resources and this initiative should help to monetise the rich resources , developing countries have.

For funding the country specific initiatives, it is possible, MDB’s can raise local resources through Local Currency Bond issues. This will help to reduce the exchange risk.

Last week, African Development Bank has issued a hybrid instrument with the features of both debt and equity, first time for a Multilateral Development Bank. Similar such instruments can be used to raise resources .

Some of the Financial Instruments, MDB’s can consider include :

Green Bonds: MDBs can issue green bonds to raise funds for projects that have environmental benefits, such as renewable energy, climate adaptation, and sustainable infrastructure. Green bonds attract investors who are specifically interested in supporting environmentally friendly initiatives.

 

Social Impact Bonds: Also known as Pay-for-Success bonds, social impact bonds allow private investors to provide upfront funding for social programs. If the program achieves predefined social outcomes, the government or MDB repays the investors with a return. This model transfers the risk of program effectiveness from the government or MDB to private investors.

 

Blended Finance: Blended finance involves combining public and private sector funds to finance projects. MDBs can leverage their concessional financing with private capital to support projects that might not attract sufficient investment otherwise. This approach can help de-risk projects and make them more attractive to private investors.

 

Currency Swaps: To mitigate foreign exchange risk, MDBs can use currency swaps. For instance, if a project is denominated in the local currency of the borrowing country but funding is in a different currency, an MDB can enter into an agreement to exchange currencies at a pre-determined rate, reducing the risk of currency fluctuations.

 

Impact Investment Funds: MDBs can set up impact investment funds that focus on sustainable development projects in specific sectors or regions. These funds can attract investors interested in both financial returns and social or environmental impact.

 

Results-Based Financing: With this model, MDB funding is tied to achieving specific outcomes or milestones. Payments are made based on the successful completion of these predefined objectives. This approach ensures a focus on results and efficiency.

 

Securitization of Assets: MDBs can bundle together a portfolio of loans or other financial assets and issue securities backed by these assets. By doing so, they can access capital markets, diversify funding sources, and potentially reduce borrowing costs.

 

Development Impact Bonds: Similar to social impact bonds, development impact bonds focus on achieving specific development outcomes. Private investors provide upfront capital, and returns are based on successful achievement of development targets.

 

Crowdfunding: While not a traditional model for MDBs, crowdfunding platforms can be explored to mobilize funds for smaller-scale projects or initiatives, particularly those with a strong social or environmental appeal.

 

Fintech Solutions: Embracing financial technology can streamline operations, reduce costs, and reach new investors. MDBs can leverage fintech platforms for digital fundraising, remittances, and payment solutions.

In conclusion, the redefining the role of MDBs , Restructuring the MDBs and Seeking new funding sources should aim to align their operations with the global sustainable development goals, foster collaboration with diverse stakeholders, and adapt to emerging challenges and opportunities in the development landscape. By embracing innovation, inclusivity, and sustainability, MDBs can enhance their effectiveness and contribute significantly to global development efforts.

 

R Kannan

 

Corporate and Economic Advisor

Why US, UK and Europe should not increase interest rates

Why US, UK and Europe should not increase interest rates

Economists Predict, further rate increases by Central banks of US, UK And Europe. The inflation level in US is down and in Europe/UK , inflation is still at a higher level. The reasons attributed in Europe and UK ,are higher Gas prices and increased food prices. These Economies are growing very slowly and keeping interest rates at high levels have several Consequences to the various stake holders in these Economies and to the Global Economy. 

To contain inflation, Central Banks are adopting Traditional theories and embarked on a interest rate hiking cycle. Whereas most of the time, the inflation seen today is due to Supply side factors and paucity of supply. When commodity prices are softening, it is surprising to note that in UK and Europe , Inflation is still at higher levels. The following factors should be taken into account while setting the interest rates.

1.     Reduced GDP growth. Interest rates in the Economy decide the competitiveness of factors of production. When interest rates are high, the cost of factors of production are also high , which results in lower demand and lower production for goods. This results in reduced GDP growth. When there is a good growth, it lifts many people out of poverty. When the growth comes down, it affects people who are from Low Income house holds. The GDP projections for these countries are not encouraging.

2.     High Probability of Recession. The recent studies have predicted that the probability of recession is very high  in countries where the interest rates are going up. Technically in two quarters, if there is a negative growth, recession sets in . Recession has its own side effects .

3.     Increase in cost of developing Infrastructure / Long Gestation Projects. There is a  large budget for revamping the infrastructure in US. This will increase the cost of projects. The projects with long gestation periods will see a steep increase in interest cost during construction, thereby increasing the overall project cost.

4.     Increase in EMI for Consumer loans. Today People borrow money for Housing , Consumer Durables and even Consumer items on EMI. In case of Mortgages, they take long tenure loans. Many a times , they take a floating rate loan. We had a big global crisis resulting from Mortgage defaults on account of  increase in interest rates.

5.     Increase in Cost of borrowing by Governments. After Covid, the Governments have borrowed lot of money and the government debt has increased by leaps and bounds. In an Economy, one of the major borrowers is Government. Increase in interest rates, increase the cost of borrowing by Governments.

6.     Erosion in value of Government Bonds held by Banks and others. After the 2008 Economic Crisis, Banks around the world was investing more in Government bonds to reduce the risk. As far as interest rate was showing a decline, banks can witness capital gains on the bonds. When, interest rates rise, the value of bonds held by Banks witness a big erosion. The recent Bank failures in US and Europe are only indicators. The Financial Stability reports by Central Banks present a good picture. But bonds held to maturity , do not show the stress signals. Many banks in these countries have unrealised losses and if HTM bonds are taken into consideration, the level of stability measured would come down.

7.     Consumer price Increase. The increase in price of factors of production pressures the Producers to increase the price of Products. This results in increased Consumer Price Inflation. The most affected segment of the society is those who are able to barely meet the basic needs.

8.     Increased inflow of funds to these countries / Appreciation of Currency. Dollar is the most preferred currency for international trade and Global capital flows. Whenever a country increases interest rates, investment in the country become very attractive. The country starts witnessing inflow of funds.

9.     Loss of Export Competitiveness. The increased inflow of funds results in currency appreciation results in loss of Export Competitiveness. In fact ,few countries in the world keep their currency weak, so that the exports are competitive.

10.Capital outflows from Developing markets. During the last Financial crisis, when US was not giving guidance on the indicators for raising interest rates, there was an uncertainty and funds started exiting from the Emerging markets. Now , most of Central Banks have set guidance for target for Parameters in deciding the interest rates. In this interest rate hiking cycle, the fund outflow was not very severe but still, there was an outflow of funds from few countries. Some of the emerging countries saw an erosion in their exchange rate which resulted in Economic Crisis.

11.Increased Global Financial Instability. The global financial crisis, started with one company, one country ,then affected the whole world. The Central banks and Financial Institutions  learnt a lot from the crisis, which helped them to manage the Crisis during the COVID period. 

12.Reduced Global trade. Movement of Goods and services across the world depends on Prospects for Economic Growth in Developed countries. When there is a lower Economic growth, it results in lower domestic demand and lower demand for imported goods. Coupling with increased protectionism affects the Global trade and Global Capital Flows.

 

What the Central Banks / Governments should do.

They should stop the increase in interest rates. The increase in interest rates so far has taken the interest rates to vey high levels considering the potential Economic growth in these Economies. Instead of focussing on Inflation, the focus should be on increasing the Economic Growth. Like the targets set for Inflation, now the Countries should set targets for Economic Growth and work backwards to develop the Sectoral Development Plans.

For the next two years increase the target for inflation. After the last financial crisis, Many Central banks have set the target for Inflation and said, the main focus is on inflation. The inflation today is due to extraordinary factors and the targets set last time are difficult to achieve. Like in the last financial crisis, there was a relaxation in valuation of investments by banks, this time, Inflation targets could be increased between 100 to 200 bps based on each Country’s Position today.

Review the basket of Goods and Services included in the calculation of Inflation and make necessary changes in the composition of index . We are living in a service Economy and contribution of manufacturing is much smaller than contribution of services. Further the consumption pattern of goods and services by the Population has undergone a significant change. The basket of goods and services could be  carefully reviewed and The indices could be recast to reflect the reality.

Manage the Demand and Supply side factors to keep the prices of essential goods in control. This time , the higher inflation is due to supply factors, disruption in supply chains due to Covid and Geo political tensions. Measures have to be identified to reduce the Demand Supply Gap and management of optimal inventory in various sectors.

Focus on Geo Economics and reduce the focus on Geo politics. In the last three years, tensions due to Geo Politics was leading to disruption in supply chains and shortages of goods and services for production. Geo political tensions generally results in loss to both the parties. Underplaying Geo Politics and emphasising on Geo Economics is Good for the entire Global Economy.

 

By  R.Kannan

Corporate and Economic Advisor

rajakannan@rediffmail.com

 

ANALYSIS

 

Updated on : Wednesday, October 28, 2020, 3:17 PM IST

Atmanirbhar Bharat and Free Tree Agreements: Can both go hand in hand?

By R Kannan

Atmar Nirbar Bharat and Free Tree Agreements: Can both go hand in hand? ANI

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Free trade agreement (FTA), a form of trade pacts, determine the tariffs and duties that countries impose on imports and exports to reduce or eliminate trade barriers. Thus, encouraging trade between countries. The agreements are focussed on providing for preferential tariff treatment. The deal also often include clauses on trade facilitation and rule-making in areas such as investment, intellectual property, government procurement, technical standards and sanitary and phytosanitary issues.

The advantages of these agreements are many. Countries like Singapore and Vietnam benefitted a lot from the FTAs. These agreements helped these countries, helped them to improve the international trade volumes and emerge as leading nations in trading. The leading trading nations in the world benefitted from the FTAs they have signed with many countries in the world.

The main advantages of FTAs are: increased economic growth, increased ease of doing business, lower expenditure by the government on subsidies, increased FDI, development of global expertise and access to the latest technologies.

The agreements help to produce the goods in which there is a comparative advantage. International trade enables countries to obtain the advantages of specialisation. International trade permits industry to take full advantages of the economies of scale (large-scale production). If certain goods were produced only for the home market, it would not be possible to achieve the full advantage of large-scale production.

FTA permits industry to take full advantages of the economies of scale (large-scale production). If certain goods were produced only for the home market, it would not be possible to achieve the full advantage of large-scale production. Free trade is often an efficient way of breaking up domestic monopolies. International trade and commercial relations often lead to an interchange of knowledge, ideas and culture between nations.

Free trade increases the earnings of all the factors as they are engaged in the production of those goods in which the country has a comparative advantage. Consumers of the different countries get the best quality foreign goods, often of a wider range of choice, at low prices. Free trade stimulates home producers, who face foreign competition, to put forth their best effort and thus increase managerial efficiency.

FTA also puts pressure on several fronts including increased outsourcing from other countries, theft of IPR, affecting the performance of domestic industries. The disadvantages of Free Trade include the dependence of a country on other countries increases. The domestic industries of the developing countries would not be able to develop rapidly due to the superior strength of foreign industries. The foreign companies become dominant players in the local market. This could lead to a lot of imports which are not essential for the country. Many a times, free trade creates a lot of geo-political and geo-economic issues between nations.

In the last three years, there is increased protectionism being seen in the leading trading countries in the world. This has been aggravated by coronavirus. The rise in protectionism due to coronavirus has made governments across the world to review their approach to globalisation, including by calling for supply-chain reshoring and heightening their scrutiny of foreign direct investment. Calls for trade diversification is expected to gain further traction in 2021. Strategies of nearshoring with supply chains becoming more regionalised—will become the norm going forward.

The present situation and the state of geopolitics and geo-economics offers a lot of opportunities for India to realise the vision of 25 per cent of GDP to come from manufacturing. The 'Make in India' can be given a good boost. Further to achieve the desired higher economic growth rate, India has to increase trade growth in big way. The leading economists in the world believe that India can achieve higher economic growth by giving a big boost to trade. When India was growing at a fast pace, trade contributed to the growth of the economy.

Prime Minister’s Programme of Atmanirbhar Bharat Abhiyan, which translates to 'self-reliant India' or 'self-sufficient India', is the vision of the Prime Minister of India of making India "a bigger and more important part of the global economy", pursuing policies that are efficient, competitive and resilient, and being self-sustaining and self-generating. Atmanirbhar Bharat does not mean self-containment, isolating away from the world or being protectionist. Under this programme, already more than 27 sectors identified for growth.

The government has also brought out production-linked incentives. After the announcement of the programme, many of the global multinationals in the world expressed their interest to set up their manufacturing operations in India. A few large multinationals like Samsung have already announced their plans to set up large factories in India.

In the central government budget also, there was an emphasis to increase the presence of Indian industries in the global value chain. The countries, which are leading global value chain, have more liberal trade policies and many FTAs. Bangladesh and Vietnam with more liberal policies overtook India in apparel exports and emerged as preferred nations for new factories in Asia.

India’s experience of the signing of these agreements is mixed. In many instances, after signing the agreement, the objectives set while signing the agreement were not achieved. The nations which signed the agreements benefitted more from the agreements. This is one of the reasons, India is treading carefully in signing new agreements. In fact, in some of the earlier agreements, the terms of the agreement were modified to protect India’s interests. In the last few years, India’s trade with Asian nations reduced but the trade with the US and Europe increased. There were review and renegotiation of the existing FTAs with ASEAN, Japan and Korea, and at the same time, forging enhanced trade alliances with the European Union, UK, US and Australia.

India can formulate a strategy, which will increase the exports and trade of India and contribute to a significant increase in economic growth. The FTA strategy to be formulated should take into consideration the following.

Government policies for the identified sectors should take into account the entire ecosystem for the sectors. The role of each stakeholder in the ecosystem should be identified and policies evolved should facilitate the balanced growth of all the stakeholders. The trade policies relating to these sectors should be liberalised after taking into consideration the protection of stakeholders who are likely to be affected by the policies. Schemes should be developed for the stakeholders who will be affected by the new policies.

Improving the Competitiveness of the sectors identified. Many sectors in India are already globally competitive. The sectors like automobiles, pharma, chemicals, apparels, IT&ITES, R&D. But in a sector like apparels, countries like Bangladesh and Vietnam have improved their competitiveness. For the identified sectors, the best practices adopted by other countries to achieve the leadership should be studied in detail and strategies could be evolved to achieve competitiveness.

To become a part of the global value chain, it is very important the input costs and cost of factors of production are very competitive. There is a need to lower duties on raw materials and intermediate goods. In a few products, there is also an inverted duty structure.

The government is working on a strategy of improving the quality standards in different industries. The conferences on improving quality were also held in collaboration with a leading institution like CII. Quality standards have to be defined and it should cover the entire ecosystem and value chain of an industry which have been identified for growth.

Logistics cost is one of the highest in the world today at 14 per cent of GDP. The government’s objective is to bring this down to 9 to 10 per cent of the logistics cost like the developed countries. This will go a big way in improving competitiveness. Towards this end, many initiatives on railways, waterways , logistics parks and centres were developed. This will go a big way in reducing the logistics cost.

After corona, every country in the world is concerned about protecting the local industries. It is very difficult to fully open the trade because MSMEs in India contribute a lot to the GDP and exports. They required government support during the liberalisation process. If a country has to improve the exports, then the export and import policies should be very liberal. There should be policies to ensure an easy import of components and raw material. The policies should consider a calibrated and phased approach to liberalise the trade in phases.

The new policies by the government have created a lot of interest from leading manufacturers in the world to set up their factories in India. Formulating a FTA policy taking into consideration the above aspects will help to make India a preferred location for manufacturing and accelerating the economic growth through increased trade.

R Kannan is an expert in finance and strategy with more than 35 years’ experience. He has been associated with TCS, Hinduja Group, ICICI Bank, among others.

 

https://www.freepressjournal.in/analysis/atmanirbhar-bharat-and-free-tree-agreements-can-both-go-hand-in-hand

 

 Article on Public Private Partnership published by Free Press Journal

Updated on : Sunday, October 18, 2020, 12:27 AM IST

PPP collaborative models to stimulate economic growth

By R Kannan

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COVID-19 was a black swan event and came as a total surprise to the world. Every segment of the society has been affected, central governments,  provincial governments, governments at the local levels, corporates and individuals. The initial expectation of COVID-19 was that it would go away soon but it was proven wrong. Based on the experience of the 2008 crisis, countries in the world were very fast to announce large stimulus measures, which has ensured good liquidity in the system. Because of the large stimulus in many countries, in many of the developed countries in the world, the slide in growth was restricted and short-term pain was reduced.

Crisis of this order, weaken the finances of all segments of the society. Despite the traditional streams of finance showing signs of decline, the government has the facility to borrow more to provide finance to the segments which require the funds and liquidity.

In India, the government was very fast to announce the measures to alleviate the pain. More than 80 crore of those who are below the poverty line and the farmers were given free rations and cash in the form of grant/direct transfer. A robust stimulus programme was announced to ensure the viability of MSMEs in India. The measures were also taken to address the issues in sectors like Banking, NBFCs and Realty. In the latest IMF economic forecast, the expectation is that the Indian Economy will contract by 10.3 per cent. According to the IMF and many of the economists/analysts, there is both fiscal and monetary space available to accelerate the growth rate in India. The economic growth will make many sectors viable, reduce the NPA in the banking system, create jobs and reduce the need for more concessions from the government.

The liquidity in the banking system is good and there is no demand for funds from various sectors, due to poor capacity utilisation. Bringing down the interest rates further, will affect the profitability of banks, reduce the income of senior citizen investors and reduce the income for those who are depending on interest income. Further, reducing the interest rate will make investments from abroad unattractive.

To make the country recover and be resilient, the estimates are that in the worst-case scenario, Rs 30 trillion of funds may be required by central and state governments to bridge the funding gap and they may have to increase the borrowing up to Rs. 30 trillion. The choice available for the central government to raise funds required from traditional sources is limited. The two choices, which can be considered are, using the physical assets available with government/government companies and large borrowing to kick start the economy.

In this crisis, innovative models of financing projects in the economy through a partnership with various stakeholders will help to reduce the funding through cash and printing more money. The government can collaborate with various stakeholders to kick start economic growth.

India has one of the good models of the PPP projects and Government / Government companies can capitalise on the strengths they have in the form of Land and Building in premier locations. PPP projects are mainly in infrastructure, long gestation and risk-sharing with the private sector. New models could focus on Resource Sharing, Knowledge Sharing and Risk sharing. After the COVID-19, sectors like Health care, Education and Community Development created opportunities for collaboration with the various stakeholders.

The government has already started leasing, operating roads; airports and ports. Now that the concept of InvITs and Reits have taken off in India, it should be possible to raise a lot of resources through these instruments.

AtmaNirbar Bharat

This has created a lot of interest among investors from various countries in the world. One of the main issues is the availability of land with supporting facilities for such projects.

Government and PSUs have a large tract of land and a large number of buildings across the cities. Few cities were developed because of large PSUs and many of these towns are still controlled by the large PSUs. Already an institution like NTPC has decided to allow other companies to operate within its premises. They can use the infrastructure already available on the campus and in the townships. A list could be made of all such facilities in India, within a period of one month. These facilities could be offered to MSMEs and those who are putting up projects under the ANB Programme. The land could be leased, rented or given as equity for developing joint venture projects. This will reduce the project risk for investors.

One of the issues in setting up a project in India is unexpected delays in commissioning the project due to obtaining all the licenses and permissions required. The government can create project vehicles for strategic Industries, obtain all the permissions and sell the fully compliant project vehicle with a good premium. This will be a valuable addition to allotting the bear land to the Project Developer.

Many of the PSUs are not doing well because they are in a business, where the business model has changed and the technology they use is outdated. This has resulted in the sickness of the PSUs. Most of the PSUs can be turned around overnight. The central and state PSUs have land and property in large cities, which have a huge value of their properties (Eg: BSNL, MTNL). By bringing in the best companies in the world in the sectors and creating a JV with them, the companies can be turned around.

In case, they are in industries which are not promising, capitalisation plan for the land and buildings could be formulated. Once the capitalisation is done, the government can ensure the debt repayment, which will reduce the NPAs of banks and  government can take the residual money in the form of dividends.

Public-Private Partnership

Within the public sector, the range of performance of companies is varying by a wide margin. But all of them have good recruitment and training process. They have people with good capabilities. What some of them lack is market orientation, good pricing strategies and good investor relationship practices in the case of companies which are doing well. The best practices from best companies in PSU’s, the private companies in the concerned sector can be gathered, assimilated and disseminated to PSUs. Since many of them are sick, a turn around plan can be developed for each sick PSU. Similarly, a forum can be created for sharing best practices of central PSUs with other PSUs/state PSUs. A leader in a sector can help the companies in the same sector to improve their policies, systems and procedures. In one of the large business groups in India, a similar concept was implemented in the year 2001 and after that many of the companies in the group have started doing very well.

Public Charity Partnership

Temples, mosques, churches and other leading religious institutions in India have  very large fund base and manage a large tract of land and buildings. They also have very high revenue, many times in hundreds of crores a year. They also manage Schools, Colleges, Townships,Hospitals and other social infrastructure. After the Pandemic, the importance of social infrastructure has become very important. Some of these institutions have the best facilities and best practices. They can be roped in to improve social infrastructure development in the areas where they are operating. A partnership model could be developed with the institutions.

Public Community Partnership

India has a very large programme for unemployed, Mahatma Gandhi National Rural Employment Guarantee programme. A very large budget is allotted for this programme, every year.

This year due to COVID-19, the additional amount has been allotted for this programme. There is a programme for capacity building of Panchayati raj institutions. The capacity building for Panchayats requires strengthening. They should be able to identify projects, which will be more beneficial than what is being done now. Focussing on projects, creating value for the village will go a big way in creating productive assets. The projects will be like building schools, dispensaries and community centres. The focus of this programme going forward could be on social infrastructure apart from physical infrastructure.

Public MFI Partnership

India is one of the largest recipients of loans from many of the MFIs. They continue to support India’s Initiatives and bullish on India’s long term Economic Growth. Now all of them encourage projects which meet ESG norms. This is in synch with our national objective of environmental friendly Economic growth. The focus for future engagement could be on Digital technology penetration, broadband penetration, Jobs creation and poverty alleviation apart from the conventional projects.

Public Foreign Financial Institution Partnership

India has become very attractive for long term funds around the world. Especially, after the stimulus by many of the developed countries in the world, the low yielding funds in the world have increased. Everybody is looking for investments, where the yields will be enough for them to meet their investment objectives. JICA, JBIC from Japan and many of the large Canadian Pension funds have invested large funds in India. Many of the large trading partners also have made good investments in India and they want to make more investments in India. Many of them, who are still not in India, not having a manufacturing base are waiting in the wings. After the new policies for manufacturing in India, there is an increased interest in India from multinationals around the world. Already many new manufacturing projects were announced by large multinationals. Many more want to come and set up shop in India.

COVID-19 and geopolitics have brought a great opportunity for India for fulfilling our ambition of taking the manufacturing GDP to 25 per cent. Through new models of the collaboration of Government with various stakeholders, India’s infrastructure development targets could be achieved and India could emerge as the destination of Global manufacturing.

R Kannan is an expert in finance and strategy with more than 35 years’ experience. He has been associated with TCS, Hinduja Group, ICICI Bank, among others.

 

https://www.freepressjournal.in/analysis/ppp-collaborative-models-to-stimulate-economic-growth