India is witnessing a steady growth in infrastructure development. To sustain this growth, the government has taken many proactive measures such as opening key infrastructure sectors to private players, permitting foreign direct investment in a several sectors, and introducing model concession agreements, among others.
While infrastructure development requires huge private sector investments over the next ten years?most of the $1 trillion investments targetted for the next five years have to come from the private sector?the private financing of infrastructure faces several impediments.
A major impediment is the almost five years that it takes for a project to start operations?including the delay in getting approvals?after winning the competitive bidding. This lengthens the gestation period and upsets the original financial assumptions of a project.
Although FDI is allowed in infrastructure, multinationals are scared of investing in projects for want of strong legal safeguards. Also, there are financial sector constraints like the difficulty in raising equity due to limited exit options, underdeveloped debt markets, insufficiency in regulatory frameworks and sector policy. For example, though it is believed that India has large gas reserves, falling gas supply has resulted in installed capacity in allied infrastructure being severely under-utilised, thus, making future investors sceptical about investing in India?s gas infrastructure.
The northern grid failure incident in August 2012 suggests the need for a change in the structure of the power sector, perhaps an overhaul of power generation, transmission and distribution verticals.
The risks involved in land acquisition, environmental clearances and political approvals are perhaps the biggest barriers to private financing of infrastructure at the moment.
Private investment will flow only when project risks are addressed by removing legal and regulatory uncertainties and by broadening the financial sector.
The government has to lay out a clear policy framework and expedite the formation of the National Investment Board, if India has to attract private funds on a large scale. The government should also think of floating a special purpose vehicle that does all the land acquisition for projects in the PPP mode.
Emphasis should be laid on improving the exit policies, which shall enable investors to exit unlisted companies through the put option. Removing the interest rate caps on external commercial borrowings could encourage foreign investors to use mezzanine funds to finance infrastructure. For financing large infrastructure projects, it is important for the country to have the ability to raise large debt financing, which is lacking in India.
The coming years will see implementation of some key infrastructure projects such as additional power generation capacity of about 70,000 MW; development of 16 million hectares through major, medium and minor irrigation works; modernisation and redevelopment of metro and non-metro airports; and six-laning of 6,500 km of the Golden Quadrilateral and select national highways. In all these, private financing will have to play a significant role.
While infrastructure investment has been predominantly financed publicly, an enhanced approach to infrastructure provision that would ensure a balance between public and private sector roles, complemented by transparent and effective public policy, is the need of the hour.
The author is an industrial engineer from the University of Michigan-Ann Arbor
