Aniruddha Chowdhury/Mint
Aniruddha Chowdhury/Mint

Opinion | Easing the government’s infrastructure burden

Private sector participation in infrastructure delivery helps deliver tangible benefits even as the fiscal space remains constrained

The private sector contributed an estimated 20 trillion, or a third of India’s 60 trillion infrastructure investment, between fiscals 2008 and 2017. However, it has declined sharply in recent years in terms of share of investment, from 37-38% to below 25% in fiscal 2018.

As the Crisil Infrastructure Yearbook 2018 released last month chronicles, over-investments in the couple of fiscals through 2012 backfired, leaving in their wake stalled projects and a mountain of stressed assets. Six years on, private investment capacity is yet to recover meaningfully.

Renewables, which have seen brisk investments, are facing headwinds today. Private investments in thermal generation are already in deep trouble with stranded capacities, stressed loans and weak demand. While airports, ports and power transmission have robust engagement models, new investment activity is tepid. In railways, and urban infrastructure, private investments are negligible. It’s down sharply at the state level as well.

National highways remain the only bright spot, where policy actions and the de-risked hybrid annuity model (HAM) have revived projects. And the recent toll-operate-transfer (TOT) auction is a great example of asset monetization and crowding-in of private capital.

To be sure, a spike in public spending has offset some of the fall in private investments. Crisil reckons spending by the Centre and states logged a compound annual growth rate of 15% between fiscals 2013 and 2017. That’s not enough. Last year, we had estimated India’s infrastructure investment spend at a modest 50 trillion between fiscals 2018 and 2022. That would be ~5.1% of gross domestic product (GDP), or significantly below past trends. Achieving even this requires considerably more private sector contribution.

Private sector participation in infrastructure delivery helps deliver tangible benefits, and there is anecdotal evidence to support this, even as the fiscal space remains constrained. In highways, airports, ports and renewables, the private sector’s role has been landscape altering. The private sector has also delivered efficiently—both on project execution (where land and clearances have not been a constraint) as well as operations.

Besides, private participation enhances public accountability. As consumers, we rarely hold public utilities to account for non-performance, and resort to coping solutions. Yet, when a public private partnership (PPP) contract is awarded, we tend to demand better services right away. When done right, PPPs bring back trust in public utilities that execute them, improve service delivery, bridge resource gaps, and help wean away dependence on unsustainable coping solutions which the poor can ill afford.

That said, history has taught us that PPPs are no silver bullet. Broad-basing private investment in infrastructure requires relentless commitment and holistic efforts from both the Centre and the states. There are three vectors along which this transformation ought to be steered; these could help rev up the stalled private investment engine.

1. Empower public institutions to drive transformation

Public institutions, viz. city governments, power utilities, and bus transport corporations, barring a few, are incapacitated and need to be the epicentre of transformation efforts. If assessed on institutional health indicators—corporatized and empowered structure, adequate capital and ring-fenced finances, accrual accounting and effective audits, and transparent disclosure—many will struggle to make the cut, and this needs to change. Capable creditworthy public institutions are an essential prerequisite to attract private investment.

2. Prepare shovel-ready projects along ppp models, rewire contracting frameworks

The government ought to build capacity to create a bankable pipeline of shovel-ready strategic projects worth $150 billion annually, with focus on sectors and line departments where this capacity is missing. This will call for (i) specialist capabilities, (ii) ring-fenced budgets, (iii) empanelment/hiring of advisors/experts, and (iv) rigorous multi-stage, multi-disciplinary reviews. Expediting creation of a PPP think-tank institution as recommended by the Kelkar committee could help. Besides, we should look beyond conventional build-operate-transfer models to annuity and investment-lite performance-contracting models. This would require recalibrating risk-sharing, and reworking contracts with clear performance metrics and flexibility to handle changes and exits.

3. Create supply-side enablers to deepen the infrastructure financing ecosystem

Stalled projects need to be dealt with steadfastly to nurse private developers and financial institutions to health. Building certainty and capacity to implement the Insolvency and Bankruptcy Code will be crucial. A concomitant and scaled up asset monetization of operational assets can attract global capital and help increase public spending and government support for greenfield PPPs. Creating a diversified and resilient financing ecosystem to facilitate a shift from overreliance on bank-led financing remains a key work-in-progress facilitation. Allied guarantee instruments to strengthen bond markets and expeditious deployment of capital under the National Investment and Infrastructure Fund are facilitations that can help.

Revving the stalling private sector investments engine is crucial to sustain and accelerate the infrastructure build-up that India needs, aspires for, and deserves. Focusing on these three vectors would go a long way in meeting that goal.

Sameer Bhatia and Anand Madhavan are, respectively, president, and director, infra and public finance, Crisil Infrastructure Advisory.

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