Financing infrastructure sector in India: Ways to improve private participation

Abstract

India needs significant investment in infrastructure sector to sustain its 9% p.a. GDP growth rate in future that will eventually help alleviate poverty in this country. Planning commission in its Eleventh Five Year plan has targeted a total infrastructure investment of $514 billion, increasing investment from 5% of GDP in 2006-07 to 9% of GDP in 2011-12. But due to fiscal and other budgetary constraints, around 30% of this quantum is expected to come from private sector during this period, which will entail significant efforts from government to ensure attractiveness of this sector for private entities. Currently the sourcing of finance for infrastructure projects relies mainly on domestic financial institutions but there are whole host of other issues wr.t. regulations and policies which inhibit free flow of capital to this sector. Hence considering the importance of private sector in bringing in risk capital for these projects, Indian government has also adopted the PPP approach to infrastructure projects in this country. The projects can either be implemented by private players on their own or there can be an agreement on one of the PPP mechanisms between public and private entities. These mechanisms allow private and public players to divide the risk, financing, implementation based on their individual skill sets and create a win-win situation by leveraging on each other’s strengths. Even years after introduction of PPP structure into India, there are still a lot of issues which private players face when implementing any infrastructure project. Based on our understanding of the issues, PPP mechanisms and some case studies, we have come up with a ‘Seven Spokes’ framework which assesses the attractiveness of infrastructure projects to private sector based on seven factors identified. These factors are – Financing, Institutional, Regulatory, Economics, Risk, Evaluation and Legal. Our analysis of Indian scenario on this framework shows that there are large gaps which need to be addressed by state, regulatory system and public entities to encourage private players’ entry into the sector. Finally, we have given the recommendations on the issues identified in this analysis which can be followed to make the environment conducive for private participation in infrastructure projects.