India’s Infrastructure Challenges

The Economic Survey 2010 – 2011 talks about robust growth and steady fiscal consolidation of the Indian economy in the year 2010-11 so far. Despite high economic growth, business opportunities in India also present some risks. In order to support this robust economic growth, India will need to improve the road & rail transport, highways public infrastructure and general transportation system.

India’s ability to grow manufacturing sector is being hampered by overcrowded roads and highways, the average productivity of a truck in India being 400 kms a day. When it comes to seaport, India is still using armies of people to unload cargo from trucks and lug it onto ships. According to Shashank S. Kulkarni , Secretary General, Indian Private Port and Terminal Association, around 95% of the total foreign trade is carried out via ports but congestion seems to persist here also on account of delayed evacuation of cargo due to inadequate road and rail capacity.  Inadequate and sporadic power supply also lead to heavy wastage and reduced industrial output. In some cities it is not uncommon for power utilities to cut off power supply at least one day a week to relieve pressure from the grid. 

Broadly, Infrastructure Problems in India can be classified into two parts:

• Urban infrastructure problems in India
• Rural infrastructure problems in India

Urban infrastructure problems in India is an age old problem. The Infrastructure problems in India mostly took a back-seat in the economic development policy drafts. The meagre budgetary allocation to arrest infrastructure problems in India has so far proved to be too little to keep pace with other areas of business development in India. Moreover, the tremendous growth of Indian IT, telecommunication, manufacturing, and pharmaceutical industries has consumed the limited world class urban infrastructure available in India.

The Urban infrastructure problems in India are:

• Urban residence
• Business premises
• Power
• Urban transport
• Water
• Sewerage
• Airports
• Railways
• Seaports
• Roads
• Bridges
• Tourism infrastructure
• Solid waste management
• Projects in SEZ
• Health care
• Entertainment
• Communications

Rural infrastructure problems in India have gone from bad to worse in recent years. However, the government of India has taken some important steps to arrest the age old problems of rural India, such as:

• Connecting 66,800 habitations with all weather roads
• Construction of 1,46,000 km of new rural roads
• Upgrading 1,94,000 km of existing rural roads
• Allocation of investment to the tune of ` 1,74,000 crore envisaged under “Bharat Nirman”.
• Providing a corpus of ` 8000 crore for Rural Infrastructure Development Fund (RIDF).

With around 600,000 villages and 70% of its population in rural India, the need of the hour for the government is to develop proper rural infrastructure for the masses in India. The immediate focus area should cover but not be confined to the following areas:

• Power
• Irrigation
• Drinking Water
• Rural housing
• Roads

• Health care
• Education
• Telecommunication

Challenges in Infrastructure Financing:

One of the key constraints in infrastructure financing is the lack of availability of risk capital to support debt raising. Adequate flow of equity capital into infrastructure sectors has not been forthcoming, despite the fact that the domestic equity market is well developed. This underlines the need for developing the market for other forms of risk capital such as mezzanine financing, subordinated debt and private equity. Shortage of risk capital in the domestic market is also grounds for seeking larger FDI into infrastructure, which would not only narrow the risk capital gap, but also usher in requisite skills to implement and monitor projects in line with global best practices.

PPPs presented an opportunity to meet India’s investment needs that can be translated into a win-win situation for all. Elaborating on the challenges that India faces in this regard, four major areas need urgent attention: the country needed a stronger policy and regulatory framework both at the centre and states; it needed appropriate market instruments and the capacity to raise long term equity and debt; the shelf of bankable PPP projects had to be expanded, and the government had to strengthen its capacity to manage PPP projects.

Ways to address infrastructure issue

Some Indian companies with large volume turnover of material work in 2 or 3 shifts to address infrastructure issues. Companies that do not have the option to be located in technology parks choose to operate outside the normal business hours to cope up with the issues of power cut in their areas. In fact, recently Maharashtra Government has proposed to frame a policy to supply power on concessional rates to industries that operate units during the off-peak hours, mainly at night time. 

Although work can be carried out in several shifts, the standard operating procedures are consistent and transferable so as to remove any production variances. Therefore, standard such as ISO 9001:2008 is highly critical to enhance the organisational outcome in order to reduce variances of quality on the operational floor and risks associated with quality defect. 

When it comes to implementation of quality management system, some companies also adopt the concept of ‘just in time’ system which minimises inventory held by a firm, and can be supplied at convenient time (perhaps even at off peak times).   Factories can then ship out smaller quantities, in smaller vehicles with quicker turnaround time.  Hence, this helps avoiding time wasted in the traffic jam during peak hours.  However, delivering the same consistency, irrespective of how small is the quantity produced and the frequency of their delivery method can be difficult.

This is why world’s leading companies implement an effective management system based on ISO 9001 standard to ensure quality consistency and to also reduce risks associated with production default. Large organisations also ask their suppliers (and in many cases make it mandatory) to be certified to ISO 9001 management system standard in order to reduce chances of product recall or customer grievances.  Some researchers also observed that companies with ISO 9001 certification perform better in long term than those who are not certified.

Several other initiatives that can be taken in the regard of Infrastructure financing as a challenge, which are classified under the following major heads.

A. Development of domestic debt capital market

B. Tapping the potential of insurance sector

C. Rationalizing banks’ and NBFCs’ participation in infrastructure financing

D. Fiscal recommendations

E. Facilitating equity flows into infrastructure

F. Inducing foreign investments into infrastructure

G. Utilizing foreign exchange reserves

Infrastructure Development in India Has a "Huge Entrepreneurial Element", says Vikram Limaye

Entrepreneurs have played a leading role in this arena, points out IDFC executive director Vikram Limaye in an interview with India Knowledge@Wharton. Limaye believes the private sector's participation in the country's infrastructure development will increase in the coming years, but cautions that India will now have to compete with the rest of the world to attract the necessary investments.

Investment in Infrastructure: Some facts based on Data

In the previous article, we showed the current scenario of Infrastructure in India, the stages various projects in Infrastructure are in, the investments India would need and the deficits we are facing for the same. Let us dig deeper into the issue and find the gap between the planned and actual investments and what measures Government can take in this regard.

India’s infrastructure spending has fallen well short of its economic growth, with the investment ratio (investment as a percentage of GDP to the GDP growth rate) declining from 50 between 1988 and 1997 to 38 between 1998 and 2007. In the Eleventh Five Year Plan, the government committed to increasing gross capital formation from 4 to 9 percent of GDP during the Plan period. The massive target set by the Eleventh Plan (see Fig. 1 below) would amount to 28 percent of the total infrastructure investment planned by emerging markets and is second only to China’s planned investments. Further, much of this investment, about one-fourth in core infrastructure, is expected to come from the private sector. Improving macro-fundamentals, easier access to and attractive fiscal incentives for private and foreign capital, and greater ability to pay user charges as a result of improved economic growth, are boosting private investment in India’s infrastructure. However, structural and regulatory barriers that impede the flow of domestic capital into infrastructure— asset liability mismatch and exposure limit issues for banks; the high pre-emption of funds from the banking system; investment restrictions on long-term savings mobilises, namely insurance, pension and provident funds; the shallowness of the bond market; and constrained supply of External Commercial Borrowings (ECB) will hamper funding to the sector. Further, the global economic slowdown and rising interest rates make project funding for infrastructure more expensive and financial closure more difficult. All these factors will create a shortfall of US$150 billion to US$190 billion in capital available for infrastructure projects. While most of the shortfall will occur in debt capital, equity flows to PPP projects will also be threatened by various structural barriers.

                                                                         Figure 1

To avert a situation that India can ill afford, the government could consider several policy reforms and interventions to stimulate capital flows into infrastructure. Such measures include various steps to remove bottlenecks to flows from existing sources of capital, for example by allowing banks to raise resources through long- term bonds exempt from statutory reserve requirements, and easing norms for insurance companies and pension funds to invest in infrastructure assets. These measures may also include encouraging new investor groups to invest in emerging infrastructure, such as mutual funds, overseas infrastructure funds and pension funds, and replicating other successful mechanisms to channel funds into the sector. In addition, the government could also consider direct financial participation in infrastructure. This could be through refinance support to infrastructure lending by commercial banks, credit enhancement of infrastructure instruments, or direct investment in hybrid debt or equity issued by infrastructure companies through an Asset Management Company (AMC) structure.

                                                                            Figure 2

While a combination of these initiatives can significantly reduce the gap foreseen between planned and actual investment, the flow of capital may prove insufficient unless supported by government measures to improve creation, uptake and execution of PPP projects. The government and key nodal agencies must address various challenges to project implementation, including land acquisition, risk allocation and contract enforceability, as a means to improve the risk-return equation for private sector players.

INFRASTRUCTURE FINANCE- BUILDING INDIA

The importance of  infrastructure for sustained economic development and improving the living standards of the population is well recognized. Yet, millions of people, across the world lack access to roads, transport, electricity, safe drinking water, proper sanitation and communication facilities. Inadequate and inefficient infrastructure not only adds to transaction costs but also prevents the economies from  realizing their full growth potential.
With Indian economy moving on a high growth trajectory facilitated by a consistent and steady growth of 8 - 9% in the recent years, there is a critical need to accelerate investments in the infrastructure sector. In fact, infrastructure has emerged as a key driver for sustaining the robust growth of the economy and the government has been focusing on development of infrastructure.

India’s infrastructure build-out envisages investments of close to US$500 billion, with US$430 billion of this in the core transport and utility sectors. About one-fourth of this investment is expected to be met through Public-Private Partnerships (PPP). Successful implementation of this ambitious plan depends on four interdependent factors namely, the creation of adequate projects for tender by government agencies, the uptake of available projects by private sector developers and cash contractors, the financial closure and start of construction, and finally, the execution of projects on-time and within budget. India faces multiple challenges along all these dimensions in its quest to reach the targets set by the Eleventh Plan. To date, India’s success across sectors has been mixed. Capacity under construction or fully constructed relative to the Eleventh Plan (an integrated measure of the first three dimensions mentioned above) reveals that only the power sector is on track, achieving 100 percent of planned capacity, while the ports sector is at 85 percent, the airports sector at 75 percent 2 and the roads sector at 50 percent (including the National Highway Development Program (NHDP) that has achieved only 10 percent of planned capacity).

But even assuming the bottlenecks in project creation, uptake and execution are tackled; India is on course to a deficit of US$150 billion to US$190 billion in financing core infrastructure sectors. Structural impediments in the financial system coupled with the global credit crisis will constrain capital flows to the sector, perpetuating the deficit in core public goods and persistent inefficiencies in the economy. These consequences can be forestalled only by expeditiously reforming the financial sector to eliminate impediments to existing sources of capital, allowing new investor groups into infrastructure projects and adapting innovative mechanisms to channel investment into the sector.

Nevertheless, the infrastructure sector provides a large opportunity for financial sector players, with potential revenues of US$10 billion to US$12 billion between the financial years 2010 and 2014,3 and a revenue pool of US$25 billion to US$29 billion beyond 2014.4 Several project models with different risk-return implications are available for capital participation across all core sectors. Success will lie in building a profitable business model that earns a high sustained return on capital.