“An obvious issue in many countries, including India, is the potential conflict between central government and local government, where different levels of government are responsible for different levels of infrastructure,” says Mr Leatherdale. “Schools are normally procured, managed and funded at local government level; national motorways at central government level. Unless everybody buys into the same goals, then you can sometimes get party politics acting as a brake on development.”
Despite such conflicts, the Indian government does not lack commitment to the development of its infrastructure and to its PPP programme. India has set a target to increase investment in infrastructure from about 4.7% of GDP in 2006 to 8% in the year to March 2012. Assuming that GDP grows at 9%, and annual inflation is about 5%, this translates into an investment of $475bn.
In a report published in May this year, a government-appointed panel of top bankers that looked into how infrastructure can be financed reckoned that the shortfall between current and required levels of investment is about $162bn. Given the tight constraints on the government’s budget, much of this investment will have to come from user charges levied on services and private investors.
The federal government has taken initiatives to make investments happen. A top-level committee on infrastructure chaired by prime minister Manmohan Singh regularly reviews investments and policies that will build a market for public-private initiatives. In January last year, the government came up with a proposal to provide an explicit public sector subsidy of up to 20% of the project cost to get more PPP projects off the ground. The Mumbai Metro rail I project was bid out under the subsidy scheme last year.
“The subsidy is very helpful and necessary but maybe not sufficient,” says Mr Leatherdale. “There is a danger of using a ‘one size fits all’ logic. Where there is a funding gap of 20% to make projects bankable for financiers and attractive for investors, the subsidy is very helpful. But if there is a 25% gap, what happens with the remaining 5%? This tool needs to be deployed flexibly. Each project has its particular characteristics, cost and revenue base, and the government should perhaps be prepared to give a greater subsidy to the highest priority projects to make them bankable and capable of being implemented more quickly and efficiently.”
Where the government has acted decisively by setting up an independent regulator or clarifying the legal framework in terms of a model concession agreement, the results have been encouraging. After it modified the initial tender conditions and set up a transparent bid process to modernise the country’s largest airports in Mumbai and Delhi last year, investors such as South Africa Airports and German developer Fraport are now part of public-private consortia that have taken up the task.
Four model concession agreements on ports, national and state highways, and several others for urban transport, provide a standardised format for PPP projects, and new ones for railway stations and container freight projects are being worked on by the Planning Commission, which provides technical support services to PPPs. The Mumbai Metro project phase II and Hyderabad Metro projects are being bid out under new streamlined guidelines to shortlist qualifying bidders put out in April, which cut out the need for a cumbersome technical evaluation of prospective investors.
Nevertheless, progress is slow and fragmented. Investors do not have recourse to an independent regulator in key sectors such as roads, railways and airports; in ports the regulator sets tariffs but does not adjudicate disputes; in electricity, petroleum and natural gas, the newly established regulators are still struggling to establish a credible track record.
Also, authorities set up under India’s competition and regulation laws do not have distinct areas of jurisdiction. Key aspects of the Competition Act 2002 apply to both regulated and unregulated sectors so it is possible that there are potential areas of conflict between both authorities in a regulated market. In a policy paper on regulation put up for public discussion, the planning commission has suggested that India must consider setting up multi-sector regulators, such as for communications, gas and fuel, electricity and transport, to avoid a proliferation of regulators, and define a workable division of labour between the competition commission and regulators.
About 147 PPP projects for roads, highways, port facilities, industrial and urban infrastructure involving an investment of Rs554bn ($13.7bn) were bid out by the federal government before December last year, while the state governments have bid out 103 projects with an investment of Rs110bn.
More recent initiatives include a $5bn infrastructure investment fund that is being put together by private equity investors Citigroup and Blackstone, the Infrastructure Development Finance Corporation (IDFC) and the Infrastructure Investment Finance Corporation. Comprising $2bn in equity and $3bn in debt, the money will be used to fund PPP projects that are being taken up by the federal and state governments. The IDFC provides specialised advisory services to government agencies and helps them through the process of bidding out projects, selecting a successful developer and achieving financial closure.
With a clear and improving commitment to PPP, and a large and educated population, India has substantial economic potential, which the government is keen to unlock through the development of infrastructures, hospitals and schools.
Almost all banking sectors are looking at the BRIC countries to expand their business. And it would appear that India is the next most appealing stop for PPP professionals.
