India’s infra: precarious or optimistic?3 min read . Updated: 04 Nov 2015, 02:50 AM IST
Top major constraints in infrastructure development over the next three years are thought to be corruption, political and regulatory risk, access to financing and macroeconomic instability
India’s huge infrastructure gap can be bridged by more public-private cooperation. That is one of the conclusions of respondents to a questionnaire that was distributed to India’s most prominent companies active in the infrastructure sector by the World Economic Forum and lobby group Confederation of Indian Industry (CII) during June-July. The performance of open, continuous dialogue ranks low and is an area that urgently requires attention and action.
Current conditions for infrastructure development may be presently difficult. However, the private sector expects that in 10 years’ time, Indian infrastructure will be much closer to being extensive and efficient. Interestingly enough, the top major constraints in infrastructure development over the next three years are thought to be corruption, political and regulatory risk, access to financing and macroeconomic instability. Macroeconomic stability is a shared concern troubling emerging market economies.
Political and regulatory risk has many facets extending from community opposition on an investment to changes to asset-specific regulations up to breach of contract’s terms. In the case of India, denial of payments from the government that go against contractual agreements seem to be perceived as highly likely to influence future investment decisions.
One of the other constraints, access to financing, touches upon the core feature of infrastructure—its long-term payback period. This closes the eye to financiers and investors that look for long term and steady returns. After the global financial crisis though, long-term lending is not easy to get, India not being an exception.
Respondents of the questionnaire say there is not enough desire from the government to take on more risk in privately financed infrastructure projects leaving the private sector exposed to many risks. Other factors constraining infrastructure development are the delayed approvals and land acquisition processes that put a strain in the long and sometimes opaque tendering processes. Large roads and energy projects can take several months to be awarded and if processes are not clear and impartial enough investors hardly mobilize resources to bid.
A common issue hindering private participation in infrastructure in most countries, known as public-private partnerships, is the lack of sufficient pipeline of bankable infrastructure projects, a feature also observed in India. Two interlinked causes for this are the lack of sustainable non-depletable financing of the early stages of structuring and lack of efficient project preparation according to standards. If reversed, these can stream more and better structured projects to sufficiently attract investors.
It’s not all gloomy though, if certain actions are taken to put the sector back in track, respondents say. Key measures can include the stronger cooperation between the private and public sectors by the creation of a communication channel. Another recommendation is about the better enforcement of a unified legal framework and the creation of better dispute resolution mechanisms in infrastructure investments.
Independent, highly qualified and business savvy regulators that will have time deadlines is also emphasized as a proposal for improvement. Institutional capacity can be improved with training and more empowerment of government officials to enable faster decisions that are vital to resolve conflict issues rapidly. Second in rank comes an area that transcends infrastructure investment and is the insistence on transparency and the enforcement of anti-corruption standards.
The above key challenges have long been raised by international and domestic investors. It seems though that the Narendra Modi government is already aware of the actions needed and has already undertaken some key reforms. Last year, the administration opened up important sectors such as railways to foreign investors that can allow more foreign capital and technology for high-speed trains and more commuter lines in cities. The government has set up a project monitoring group (PMG) to monitor frozen projects and to remove their bottlenecks. Any project in infrastructure can be referred to the group for resolution. The PMG has already been successful in resolving more than 200 of the projects referred to it, worth nearly 30% of the value of all projects (World Bank: India Development Update, April 2015).
This year’s budget also clearly demonstrates the intention to fix some of the problems. Indeed, by putting into motion higher public spending, new infrastructure funds and a more transparent PPP process, the government seems committed to addressing those key challenges.
Vangelis Papakonstantinou is Project Lead, Infrastructure Initiatives and Global Leadership Fellow, World Economic Forum.