With $80 trillion available in international long-term capital for investment, there is no dearth of funding that India can tap into to bring its infrastructure insecurity to an end.
India is transforming” is a refrain that echoed throughout Raisina Dialogue 2017, and numbers backed it up.
The seventh largest economy in the world, India is set to overtake China’s population and become the most populous nation by 2022. With an average age of 29, India will also become the youngest nation in the world by 2020, and changes in the demographic and economic makeup of the country will lead to the doubling of its urban population by 2030.
Over the last few decades, India’s hyper growth has led to an aspirational population with needs that have stretched the resources of the nation to its brink, infrastructure being the major requirement. India’s infrastructure gap has been studied ad nauseam, with economists all over the world agreeing that bridging India’s infrastructure gap would act as a catalyst for its economic and development leap. To bridge this gap, however, an investment of $1.5 trillion over the next 10 years is needed.
Having said that, as was pointed out during a roundtable discussion, it is not feasible to expect the Indian government to finance this alone. With $80 trillion available in international long-term capital for investment, there is no dearth of funding that India can tap into to bring its infrastructure insecurity to an end. However, attracting this capital to India is a challenge.
Sovereign wealth and pension funds have limited appetite for what is viewed as regulatory uncertainty when it comes to India. Regulatory risks can manifest themselves in various forms, whether tariff entries based on differing interpretations of government provision or lack of enforcement when it comes to upholding purchase agreements. Additionally, concerns about the legal system also tend to dissuade investors.
Harkening back to the days of the East India Company, one of the roundtable participants reminded everyone that the private sector had proved to the fail-safe for services that the government was unable to provide back then. While robust frameworks have been created and implemented for infrastructure development over the last few decades, India is ranked 172 out of 190 countries when it comes to enforcement of contracts. Often, the private sector signs agreements made under the aforementioned robust framework, with no intention of honouring the contract because they know it will not be enforced in court. It cannot be denied that a common tactic by the private sector in India has been to press for renegotiation of contracts for infrastructure projects by using threats of delays and cost overages. This—inherent delays in Indian infrastructure projects — is another significant concern for investors eyeing India.
While comparing the Indian and Australian public-private partnership model, it was brought to attention that the latter country has a predefined criteria for infrastructure bid processes, with a time frame of 15 to 18 months from initial interest to financial close. India, on the other hand, recently employed the Swiss Challenge methodology to award project contracts to redevelop 23 railway stations, which will force the government to wait for 18 months before the bid can be even awarded. Further, an additional eight to 12 months would be required for financial close, leading to actual construction only beginning after 20 months since the bid opened. That’s twice the duration of the Australian timelines.
It cannot, however, be denied that steps have been taken by the Indian government to address institutional investor concerns. An innovative solution that has come to fruition in the Indian markets has been credit enhancement. Even the best-rated projects are capped in their credit evaluations by the sovereign’s credit rating, a high-ranking government official pointed out at the roundtable discussion. For a higher rating of a project, it can be sent to the credit enhancement fund to obtain a guarantee for a certain portion — say 30 percent — of the project value. The guarantee effectively boosts the credit rating of the project past the sovereign credit rating, often making it attractive enough for institutional investors.
Another innovative solution employed by the Indian government has been the formation of Infrastructure Investment Funds (InvITs), which takes contributions from several investors and uses the funding for a multitude of infrastructure projects. This lowers the amount of risk for investors since their money is not focused on one project but invested in various projects across sectors such as sanitation, roads and renewable energy, among others.
The most promising step taken by the Indian government has been to encourage international institutional investment through the implementation of toll-operate-transfer (TOT) model. The TOT model essentially takes infrastructure assets that are currently operating and generating steady profits, and auctions them to international investors. The infrastructure projects that are being auctioned off generate annual revenues of INR 2,700 crore and are expected to rise between INR 25,000 to 30,000 crore in the next 30 years. Essentially, the TOT model trades in 30 years of future annual flows for a lump-sum payment, which can then be used to fund new infrastructure funds that the country needs.
While there is no doubt that India’s infrastructure needs remain great and many, institutional investors are wary of committing to fill the gap in this need. However, the steps that have been taken by the government and the vision that its leaders across ministries hold show that it is possible for India to catapult into the future.
The views expressed above belong to the author(s).