What’s holding up India’s infrastructure?

India has an enormous infrastructure gap, but it can be bridged by cooperation between the public and private sectors, according to a questionnaire that was distributed to India’s most prominent companies active in the infrastructure sector earlier this year.

According to the survey, conducted by the World Economic Forum and Confederation of Indian Industry, there is not enough open, continuous dialogue, and it’s an area that urgently requires attention and action. Current conditions for development may be difficult, but in 10 years’ time Indian infrastructure will be more extensive and efficient, according to private-sector respondents.

The top major constraints in infrastructure development over the next three years are thought to be corruption, political and regulatory risk, access to financing and macroeconomic instability. This last is a shared concern troubling emerging-market economies.

Political and regulatory risk has many facets. They include community opposition on an investment, changes to asset-specific regulations and breach of contract terms. In the case of India, denial of payments from the government that go against contractual agreements seem to be perceived as highly likely to influence future investment decisions. One of the other constraints, access to financing, touches upon the core feature of infrastructure: its long-term payback period. It affects financiers and investors who are looking for long-term and steady returns. After the global financial crisis though, long-term lending is not easy to get, India not being an exception.

Respondents to the questionnaire believe the government doesn’t want to take on more risk in privately financed infrastructure projects, leaving the private sector exposed. Other factors constraining infrastructure development are the delayed approvals and land-acquisition processes that put a strain on the long-lasting and sometimes opaque tendering processes. Large road and energy projects can take several months to be awarded and if processes are not clear and impartial enough, investors hardly mobilize resources to bid.

Better structure, more investors

In most countries, a common issue hindering private participation in infrastructure, known as public-private partnerships, is the lack of a sufficient pipeline of bankable projects. This has been observed in India. Two interlinked causes for this are the lack of sustainable, non-depletable financing of the early stages of structuring, and lack of efficient project preparation according to standards. If reversed, these can stream more and better-structured projects to sufficiently attract investors.

It’s not all gloomy, though: certain actions can be taken to put the sector back on track, respondents say. Key measures include stronger cooperation and communication between the private and public sectors, the enforcing of a unified legal framework and creation of better dispute-resolution mechanisms for infrastructure investments. Clear deadlines and independent, highly qualified and business-savvy regulators were also proposed. Institutional capacity can be improved with training and empowerment of government officials. This can enable faster decisions that are vital when it comes to rapidly resolving conflict issues. Then there is the insistence on transparency and the enforcement of anti-corruption standards.

The above key challenges have long been raised by international and domestic investors. But it seems that Narendra Modi’s government is already aware of the actions needed and has already undertaken some key reforms. Last year the administration opened up important sectors, such as railways, to foreign investors; these can allow more foreign capital and technology for high-speed trains and more commuter lines in cities. The government has set up a Project Monitoring Group (PMG) to track frozen projects and remove bottlenecks. Any project in infrastructure can be referred to the group for resolution. The PMG has already been successful in resolving more than 200 of the projects referred to it, worth nearly 30% of the value of all projects, according to the World Bank.

Furthermore, this year’s budget clearly demonstrates the intention to fix some of the problems. Indeed, by putting into motion higher public spending, new infrastructure funds and a more transparent PPP process, the government seems committed to addressing those key challenges.

Author: Vangelis Papakonstantinou, Senior Manager, Global Strategic Infrastructure Initiative, Infrastructure & Urban Development Industries, World Economic Forum

Image: Workers fasten iron rods together at the construction site of a bridge on the outskirts of Jammu February 12, 2013. REUTERS/Mukesh Gupta