"At the end of the day it's easier to build a road than it is to build a democracy". Nandan M. Nilekani, Executive Co-Chairman, Infosys Technologies, India; Member of the Foundation Board of the World Economic Forum

To sustain and realize India's growth potential, the government of India has tabled ambitious plans to boost infrastructure investment from historic levels of 3-4% of GDP to around 9% by 2012. The Planning Commission's current infrastructure investment estimate within the 11th Five-Year Plan period stands at US$ 490 billion. These plans do not include private capital expenditure investments, which will lead to an even greater demand for infrastructure-related services and products. But many business people harbour doubts that these plans will come to fruition because of resource gaps faced by the public and private sectors.

But the cost to the economy of not dramatically improving infrastructure will be huge. Even though India's US$ 1 trillion economy is growing at 8-10% per annum, most analysts agree its lack of infrastructure costs the economy between 1.5% and 2% of GDP per annum. This equates to between US$ 95 billion and US$ 134 billion lost in cumulative GDP by 2012.

The Indian government recognizes that it faces a significant task. On one hand, public sector borrowing restrictions and the lack of construction resources mean it has to approach the private sector to help fund and implement their plans. On the other hand, the private sector faces significant resource and talent issues of its own to cope with extra demand for construction. The current five-year plan for infrastructure sets aside an average of 30% (US$ 145 billion over five years) in PPPs and purely private infrastructure-related projects. Telecommunications, roads, ports and airports are the main targets for the higher share of private funding, reflecting recent significant steps taken by the government towards embracing the private sector (see Figure 1).

Rajat M. Nag, Managing Director-General, Asian Development Bank, Manila

The National Highways Authority of India has led the way by successfully completing the Golden Quadrilateral project through revenue sharing arrangements with private contractors, introducing model concession agreements as well as acquiring land in a practical manner. The government did not interfere when the telecommunications private sector innovated by introducing leapfrogging technology to eliminate the need to lay an expensive network of land cables.

Further, the government has "pre-approved" 11 international and domestic consultancies to advise on infrastructure related projects to make the bidding process simultaneously quicker and more transparent. Additionally, it has authorized a viability-gap financing mechanism for projects that do not meet purely return-oriented targets, and recently set aside a US$ 100 million fund to finance the exploration and design of designated projects.

However, there are many areas that still lack clarity and need attention. First among these is the lack of "bankable" projects. General project funding requirements are easy to determine, but private sector players complain there are no clearly articulated projects defined in a way that they can readily start executing.

Even if clearly defined projects existed, pricing and risk management, especially between public and private entities, will need more sophistication and should move away from a traditional "cheapest supplier" mindset. For example, two ultra-megawatt power facilities have been negotiated on 40-year fixed price contracts. While in the short term this may seem like a great deal for the government, it has unwittingly introduced unsustainable pricing and risk policies that may deter future private players from bidding by such risk distortion.

Indeed, more broadly, public and private entities need to reflect on their respective abilities to manage and control the variety of development, construction, financial structuring and market risks, and allocate them appropriately within PPP frameworks. And the social consequential risks need addressing too, especially regarding the resettlement and rehabilitation of affected voting populations.

Complicating the picture further, cross-sector government cooperation is not strong. Silo-led developments, rather than integrated approaches, lead to stunning examples of where nearly-built structures, such as Bangalore's international airport, will have no quality roads leading to or from them when they open.

But blame is too easily put on the government. Consumer mindsets are also a problem. Central government ministers as well as state chiefs are rightly afraid to place a price on commodities seen as essential to rural area welfare, for fear of a voting backlash. Rural areas, in particular, expect water to be provided without cost. Some experts have suggested introducing a "water credits" system similar to carbon credits to discover the price of increasingly scarce potable supplies. But the Planning Commission does not envisage much private participation in either irrigation or water supply.

"The government regards infrastructure as a critical constraint. It is our view that the target we have set for the economy which is to accelerate to an average of 9% growth cannot be achieved if we fail to make efforts in infrastructure". Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India

Dispute resolution needs to be significantly streamlined. Complex decision-making jurisdictions that are constitutionally mandated within national, state and local power seats add significant cost and time overruns to infrastructure projects that cross boundaries and encroach on several sovereignties. A properly functioning and responsible arbitration mechanism is generally absent with non-binding decisions and cases waylaid in courts or automatically referred to the Supreme Court.

But even if mindsets shift significantly, will there be sufficient capacity to execute? First, large engineering and construction companies with mega-project management capabilities in India are few in number. The industry lacks not only size but also appropriatelytrained manpower. Of the 500,000 total engineering graduates, only 5% are civil engineers. And even those graduating are lured by higher wages in other non-infrastructure-related sectors such as call centres or jobs in the Middle East offering much higher salaries. Especially acute is the shortage of talent at the planning, design and maintenance levels - particularly at the middle-management stage - which will inevitably lead to improperly planned projects risking high alteration costs and poor quality execution. Thus, the commonly held perception that India is an abundant oasis of engineering talent is plainly false. As Chaly C. K. Mah, Chief Executive Officer, Asia Pacific, Deloitte, Singapore, noted, "When you talk about skilled labour, there is a massive shortage in India and the core is to ensure you have a solid education system".

Even though the engineering and construction industry in India employs over 32 million people, it has not until recently been recognized as an industry. However proud India is of its centres of education excellence, they only cater to a minute proportion of the population. The rest of the "educable" workforce, as N. K. Singh, Deputy Chairman, Planning Commission, Government of Bihar, India, dubbed them, are not emerging with the right skills, leaving many enlightened companies to take the initiative to train them "on the job" and issue skill certificates.

Government officials and private sector players agree on one thing, though: comparisons between China and India regarding infrastructure development should stop, since the two systems are so unlike one another when it comes to large-scale planning. Indian officials like to portray China as a centralized polity that has no problem or issue with moving large populations to make way for critical infrastructure projects. Of course, this view misses the underlying tensions between centre and provinces. But one thing is clear, and put best by Nandan M. Nilekani, Executive Co-Chairman, Infosys Technologies, India; Member of the Foundation Board of the World Economic Forum: "At the end of the day, it's easier to build a road than it is to build a democracy".

Meeting India's Infrastructure Challenge

The current state of the country's infrastructure and the government's new proposals to increase expenditure to 9% of GDP by 2012 (see chart) formed the basis of a workshop organized by the World Economic Forum and the Confederation for Indian Industry (CII) ahead of the India Economic Summit. The private meeting comprised a broad array of stakeholder groups including government officials, private sector players, global engineering firms, consultants, financial intermediaries and multilateral organizations, including the World Bank. Building on the findings of the World Economic Forum's Engineering & Construction: Scenarios to 2020, participants noted that the central government has made a lot of progress on changing mindsets by actively involving the private sector and making the bidding process for projects more transparent. Financing for projects in general did not seem to be an issue, but participants called for greater depth in private sector bonds to match project tenures. Private sector participants also called for more clarity on the range of detailed projects envisaged by the government to assist in their planning and more detail regarding the mechanism of public-private partnerships. They also highlighted the fact that different sectors should learn from others in terms of best practice. In addition, they commented that, given the growing number of options for investment opportunities globally, India needs to focus on making it easier for multinational companies to work on infrastructure projects. Rajiv Lall, Managing Director and Chief Executive Officer, Infrastructure Development Finance Company, India; Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India; Rajat M. Nag, Managing Director-General, Asian Development Bank, Manila; Ajit Gulabchand, Chairman and Managing Director, Hindustan Construction Company, India Finally, the group mandated that the Forum and CII produce a series of case studies highlighting infrastructure solutions already being implemented around the country. This, they said, would help share best practices within India and shed light on the Indian infrastructure situation for global companies.