Investment in infrastructure projects in India

The importance of infrastructure development in India can never be overemphasized. For the continued economic growth; and more so an inclusive growth; infrastructure development is a must. The sectors like roads and transport, railways, airports and seaports, power generation, transmission and distribution, telecommunication, water and sewage have developed at considerable growth rates in the last decade but there are miles to go. The power sector, for example, has come a long way from being dominated completely by government-owned utilities to a well regulated sector with private sector participation in generation, transmission and distribution. Similarly, airports of Delhi, Mumbai, Hyderabad and Bangalore have been renovated and developed through private sector participation. Tolling and annuities based road projects have been successful in several places and government has been able to attract private sector investments in road development and maintenance. The cases are similar for other sectors too, more so in telecommunication sector, whose success can be gauged by the fact that the call rates in India are one of the lowest in the world.

Financing infrastructure projects is challenging at times. The hitherto considered natural monopolies, the infrastructure projects tend to have large gestation periods and may have capital intensity as well. These may lead to a risk profile that may need enhanced appetite from such investors. However, the investment decisions are influenced by the fiscal support that the government provides in more cases than not, level of project preparation, the ease of capital sourcing, subsidies and grants, and cash flow profile and user fees. The preferred business model for infrastructure development has been public private partnership (PPP), mainly due to the relative strengths of government-owned agencies and private participants in various aspects of project development and financing. Synergies between them can lead to effective risk sharing and hence, lowering the risks for private sector investments. There are several models of PPP and they have been implemented based on the project profiles and investment requirements.

An emerging trend that has been noticed in the developing countries in financing infrastructure projects is that growing proportion of such projects are being financed by the local investors, which is in contrast with the earlier trend of investors from the developed world investing in significant proportions in such projects. The proportion of investments in infrastructure from developed and developing countries investors have almost matched and the trend of increasing share of those from the developing countries is likely to continue. In order to develop better comprehension of the trend, the World Bank through its arm Public-Private Infrastructure Advisory Facility (PPIAF) along with PricewaterhouseCoopers conducted a survey to identify motivation factors and constraints that such developers may have. It has been observed in this survey that the developing countries investors have been matured players and have prior experience in the sector, which has led them to invest in the sector to tap the growth opportunities. Their major concerns have been political and social risks and stability of regulatory regimes. However, a majority of such investors are observed to have made their expected returns on their investments in past. It may then well be the government’s responsibility to address their concerns and thus facilitate their further investments in the sector.

(The article was published in the Charter magazine, Sept. 2008 issue)