The importance of modern, efficient and sustainable infrastructure has been well recognised across the political spectrum in India. Successive governments, especially since the early 1990s, have placed strong emphasis on fostering infrastructure development. We can always debate how much progress we have made and how and why we could have done better. However, as the new government settles in for its term of office, it is clearly more productive to focus on the path forward as there are still vast, unmet needs for additional infrastructure. And the urgency of this task is widely shared.
Infrastructure development is however a complex and challenging exercise for various well-known reasons. Fostering the rapid development of sustainable, efficient and competitive infrastructure in India requires a renewed focus on policy and executive actions on the part of the new government, which by far the most important stakeholder in this domain.
Given India’s vast needs for infrastructure, it is important for the new government to review and articulate its strategic priorities for infrastructure projects and sub sectors. This process needs to include a renewed commitment on already announced priorities and projects where substantial investment has already been made such as the Delhi Mumbai Freight Corridor, the Namami Gangey Project and so on. It is critical that these priorities are discussed and shared in a broad consensus by all stakeholders including state and local governments. Every effort should be made to build an ‘operating consensus’ to achieve project execution in the most efficient manner possible.
The government has announced and implemented many special programmes and initiatives over the years to support infrastructure development with special budgetary allocations for various forms of financial support. Such initiatives must be complemented by support at the relevant operational levels for project conceptualisation and design, development of contractual and regulatory framework, processes and capacity for evaluation and award of bids, improving capacity for regulatory oversight and contract management, as well as facilitation for various project-related permissions and approvals.
As India’s infrastructure needs grow and domestic execution capacity is stretched due to financial and operational constraints, policies relating to foreign sponsor participation in infrastructure projects need to be reviewed to explore ways to enhance international participation in domestic infrastructure projects. India faces considerable competition in this regard from other emerging markets keen to attract international developers with the best technologies and deep experience of specialised infrastructure sectors. Given the success India has had in recent years in attracting FDI in various sectors, it should be able to do the same for the infrastructure sector as well.
As both the government and private sector resources are constrained for new investments, a strong emphasis needs to be placed on monetising existing government assets through various programmes such as asset recycling and yield cos to free up resources for new investments in a non-inflationary manner. Steps need to be taken to encourage greater use of the INVITs programme which has seen some initial success but has yet to deliver on its full potential.
The new government will have the challenge of addressing the issue of handling many non-performing infrastructure projects both from a sectoral and service delivery perspective but also from the impact of such projects on the health of the Indian financial sector as the contagion effect of major project defaults spread across the entire financial sector. Addressing the issues created by the situation of IL&FS has become a particularly important priority in this context. Efficient implementation and further improvement of the bad debt resolution and insolvency frameworks will be critical in this regard.
Given the long duration and complexity of infrastructure projects it is quite common for disputes among various contractual counterparties to arise during the project life cycle. An efficient dispute resolution mechanism is critical to ensure that such disputes are resolved quickly, conclusively and transparently to give confidence to all counterparties and avoid operational and financial losses that occur when projects are locked in disputes over extended periods.
Renewing the confidence among debt investors in infrastructure projects should be high on the agenda of the new government as it seeks to revive the flow of long-term capital to the sector. This has become particularly important in the context of deteriorating sectoral risk perceptions among senior debt investors. This is a serious issue which needs to be addressed actively by effective measures including credit risk mitigation programmes if necessary, to bring such investors back into the long-term infrastructure financing space.There are many estimates of the billions and trillions of dollars looking for
long-term infrastructure assets, but the reality is that such investments will not flow into the sector unless investors are assured of an acceptable risk/return profile for their investments. Several specific steps can be taken in this direction including:
1. Preserving the sanctity of existing infrastructure SPVs in the context of sponsor bankruptcy
2. Fast-tracking the development of a financial guarantee programme or institution to support strategic projects achieve high ratings to attract large volumes of debt investments
3. Development of credit enhancement programmes that enable efficient solutions for capital market investors such as construction risk guarantees, contract repudiation insurance and partial guarantees for long-term currency risk exposures
4. A renewed look at financial incentives for lending to the infrastructure sector including favourable tax treatment and a more flexible refinancing programme for banks against infrastructure exposures.
By pursuing such a path, the new Indian government can create the much-needed progress on infrastructure development in India.
Arun Sharma is a non-resident senior associate with the Wadhwani Chair in US-India Policy Studies at the Center for Strategic and International Studies.