Reviving private investment in infrastructure will be key in post-Covid recovery

Reviving private investment in infrastructure will be key in post-Covid recovery

  • Elias George, Partner |

3 min read

Currently, the quantum of private financing flowing into the infrastructure sector has ebbed to around 20 per cent of the total funding.

The story of public-private partnerships (PPPs) in India has been a chequered one. While we have had some notable successes, the landscape is also littered with troubled projects, ranging from ones where unfair risk allocation by government entities has upended the fortunes of the private partner, to ones where the private investor has managed to extract more than a fair share of benefits from the project.

Currently, the quantum of private financing flowing into the infrastructure sector has ebbed to around 20 per cent of the total funding, for reasons that are well known — the crisis in the non-banking finance sector, the financial challenges faced by infrastructure companies, and the inadequately developed Indian market for infrastructure financing. The Economic Survey 2017-18 has assessed India’s infrastructure financing needs at $4.5 trillion by 2040. Reviving private investment flows into infrastructure creation to more sustainable levels of around 40 per cent will be key to attaining this threshold.

The challenge of ramping up private investments in infrastructure will need action on two fronts: Refreshing institutions and policies for channeling financing; and providing a stable, durable, and empowering ecosystem for private players to partner with government entities in the task of infrastructure-creation.

Learning from the past mixed experience of PPPs, we need to reimagine and redesign the PPP ecosystem along many fronts. The Vijay Kelkar committee had put out a timely, practical, and balanced report in 2015 on overhauling the PPP ecosystem, including governance reform, institutional redesign, and capacity-building. This report is laden with eminently sensible plug-and-play recommendations which can radically improve the PPP environment, if implemented with consistency and firm purpose.

Among the most difficult, but necessary initiatives, is the need to overhaul the culture and attitude towards the conjoining of government entities and private partners for creating specific pieces of infrastructure. As the Kelkar committee has stated, there needs to be an approach of give and take, instead of government interlocutors trying to adopt a purely transactional approach without adequate focus on outcomes, while also trying to minimise risk to themselves by passing on uncertain elements in a project — like the land acquisition risk — to the private partner. This attitudinal change can be facilitated if laws like the Prevention of Corruption Act are further amended to encompass modern-day requirements, including factoring in the need for government agents to take calibrated risks while engaging with the private sector. The private partners also need to be incentivised to focus on project outcomes, with guard-rails in place to discourage rent-seeking behaviour. In sum, risk avoidance by the public entity and rent-seeking by the private partner are the twin challenges that need to be carefully addressed.

On the regulatory front, a compelling need would be to promulgate a PPP legislation which can provide a robust legal ecosystem and procedural comfort to the various actors and stakeholders. Such legislation should encompass the need for fostering innovation and global best practices, factoring in the requirements of diverse infra sectors ranging from water-supply to telecom and also enabling flexibility in project design and execution.

Infrastructure projects typically have long-duration profitability cycles. The key to a successful PPP is to provide stable revenue flow assurances and a settled ecosystem to investors over long periods by means of policy stability, assurances possibly secured by law. PPP contracts also need to provide for mid-course corrections given that the ecosystem surrounding the infrastructure piece, including utilisation patterns, as well as the creation of competing infra assets may necessitate a dynamic approach to aspects like risk and revenue sharing. Given the complexity surrounding the creation of infra projects, and the difficulty of predicting the stability of revenue flows over long periods of time, government partners in PPP arrangements need to ensure that open-ended arrangements that might entail unforeseeable risk are minimised for the private investor, including aspects such as land availability and community acceptance.

After we emerge out of this pandemic, a focus area for public policy has to be the creation of a modern-day, sustainable and resilient infrastructure that not only improves the ease of living for all Indians, but also absorbs a majority of the millions of young people who enter the workforce every year. Designing a fresh approach and creating a stable policy environment that provides comfort and incentives to private investors will be key to attaining this goal.

(A version of this article appeared in The Indian Express on 09 October 2020)