The road to India’s $5 trillion economy
- If planned well, cities can promote businesses, offer greater job prospects, and provide a better quality of life for people. To achieve that, municipal governments will need to address challenges, including poor air and water quality, and regulatory bottlenecks.
As the world cautiously emerges from Covid-19, countries are charting a roadmap to accelerate economic growth and build future resilience. Given that the global pandemic strained public resources, public-private partnerships (PPPs) can be an effective tool to optimise private sector expertise and efficiency, raise private capital leveraging scarce public funds, and build back better by offering quality, efficient services to people.
For India to realise its vision of a $5 trillion economy by 2025, $4.5 trillion must be invested in national infrastructure by 2030. Timely and efficient implementation of this investment is critical to meet the challenges of a major demographic-economic trend: by 2030, around 42% of India’s population is likely to live in cities, and the number of metropolitan cities is estimated to increase from 46 (Census 2011) to 68 in 2030. To make cities liveable and sustainable, citizens need efficient services, including transport, sanitation, and others.
If planned well, cities can promote businesses, offer greater job prospects, and provide a better quality of life for people. To achieve that, municipal governments will need to address challenges, including poor air and water quality, and regulatory bottlenecks.
The question is, how?
The PPP model can be an effective and sustainable option to strengthen the nation’s infrastructure. A leading country in terms of PPPs, India ranks 70 out of 140 countries for infrastructure quality in the Global Competitiveness Index. Over the last few years, the government has rolled out several PPP programs for the delivery of timebound, high-priority public utilities and infrastructure. Going forward, the private sector needs to expand its focus to include underserved sectors such as water, waste, and power distribution. To increase the number of infrastructure projects and tap the massive investment needs, the involvement of municipalities will be critical for India.
Recognising the need for investment in municipal infrastructure, the International Finance Corporation (IFC), a member of the World Bank Group, has provided more than $10 billion in financing for 300 projects and provided advisory services to cities in more than 60 countries over the past decade. In India, we have partnered with state governments on bankable PPPs focused on climate, social and economic inclusion, and sustainable infrastructure and connectivity, that could serve as a template for emerging markets. This includes the commercial closing of 1.5 GW-capacity Agar, Shajapur and Neemuch solar parks in Madhya Pradesh, which smashed the tariff floor and almost halved the average solar power purchase cost of the state.
Through the project’s innovative two-procurer arrangement, the Indian Railways will procure power to run trains in seven states benefiting millions of Indians. IFC structured India’s first hybrid-annuity PPP for sewage treatment, boosting the National Mission for Clean Ganga in Uttar Pradesh and Uttarakhand, and improving water quality for millions living on the banks of the Ganga River. We have also developed pioneering health PPP projects for tertiary hospitals, medical education, diagnostic services, and universal social health insurance in multiple states including Maharashtra, Bihar, and Jharkhand.
Future Roadmap
Despite the Indian government’s approach to decentralised growth, encouraging cities to consider investing strategically by tapping options for commercial borrowing is the biggest challenge. In FY18, the average commercial borrowing by the 37 largest municipalities was less than $9 million per city.
Also, while initial municipal bonds are a step in the right direction, there is scope for more funds to be raised. To scale up, the use of guarantees and credit enhancement for projects (rather than just support as viability gap or funding) would be a great step ahead. Further, the guarantees should be made with fiscal sustainability in mind. In our experience, the targeted use of guarantees or credit enhancement mechanisms in PPP structures can effectively leverage private sector funding while addressing counterparty risks.
Moreover, a clear pipeline of national and municipal infrastructure projects with timelines will allow equity investors, lenders, and developers to plan better. A well-designed strategy with uniform guiding principles for quality contracts will attract more private-sector funders and developers, including international players while enabling smooth implementation.
For a country as diverse as India, PPPs can lead to faster implementation of projects, lower costs, and increased efficiency to sustain higher performance over the life of the projects. Most importantly, by mobilising private capital, PPPs can free up scarce public funding for a range of critical services—irrigation, sanitation, health, and education.
With municipal authorities and state governments collaborating with the private sector to build sustainable cities, we are confident India will soon be ready for the next chapter in 21st-century urban resilience.
Hector Gomez Ang is Regional Director, South Asia, IFC and Thomas Edward Lubeck, is Manager, PPP Transaction Advisory, South Asia and East Asia Pacific, IFC
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First Published:28 Jul 2022, 01:38 PM IST
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