With $100 trillion in international long-term capital available for investment, there is no dearth of funding that can be tapped into, to bring India’s infrastructure insecurity to an end.
India is transforming. This common refrain was echoed throughout Raisina 2017, and the numbers back it up. With the seventh largest economy in the world, India is set to overtake China as the most populous nation in the world by 2022. With an average age of 29, India will also be the youngest nation in the world by 2020 and changes in the demographic and economic makeup of the country will lead to India’s urban population doubling by 2030.
India’s hyper growth has led to an aspirational population with needs that have stretched the resources of the nation to its brink the largest of which is infrastructure. India’s infrastructure gap has been studied ad nauseam, with economists all over the world agreeing that bridging India’s infrastructure gap can be the catalyst for its economic and development leap. In order to bridge this gap, however, an investment of $1.5 trillion over the next ten years is needed. As pointed out by a participant during the Raisina infrastructure roundtable, it is not feasible to expect the Indian government to try and finance all of this.
Harkening back to the days of the East India Company, the private sector has been the fail safe for services that governments were unable to provide. With $100 trillion in international long-term capital available for investment, there is no dearth of funding that can be tapped into, to bring India’s infrastructure insecurity to an end. There are issues in attracting this capital to India, however.
The reasons for institutional investor avoidance for infrastructure projects in India are manifold. As a number of our participants pointed out, sovereign wealth and pension funds have limited appetite for what they view as regulatory uncertainty when it comes to India. Regulatory risks can manifest themselves in various forms, whether it is tariff entries based on differing interpretations of government provision or a lack of enforcement, when it comes to upholding purchase agreements.
Additionally, concerns about the legal system also tend to dissuade investors. While robust frameworks have been created and implemented in regards to infrastructure development, India is currently ranked 172 out of 190 countries when it comes to enforcement of contracts. Oftentimes the private sector signs on to agreements made under the aforementioned robust framework, with no intention of honouring the contract because they know that it will not be enforced in court. A common tactic by the private sector in India is to press for renegotiation of contracts for infrastructure projects, by using the threat of extended delays and cost overages.
A third significant concern that investors seem to have, centre on the delays inherent in Indian Infrastructure projects. A comparison was made during the roundtable between Australian and Indian public-private partnerships for infrastructure projects. Australia was described as having a predefined criteria for infrastructure bid processes which had a time frame of 15 to 18 months from initial interest to financial close. India, on the other hand is using a Swiss Challenge methodology to redevelop 23 railway states, which will force the government to wait for 18 months before the bid can be awarded. An additional 8-12 months would be required for financial close, leading to actual construction beginning a projected 30 months after the bid opening — double that of the Australian time frame.
There have been steps taken by the Indian government to address institutional investor concerns. An innovative solution that has come to fruition in the Indian market has been credit enhancement. As a high ranking government official stated, even the best rated projects are capped in their credit evaluations by the sovereign’s credit rating. In order for the project to attain a higher rating, it can go to the credit enhancement fund, which has already been set up, and obtain a guarantee for a certain portion of the project value. The guarantee effectively boosts the credit rating of the project past the sovereign credit rating, often making it attractive enough for institutional investors.
Another innovative solution employed by the Indian government has been the formation of infrastructure investment funds (InvITs), which take contributions from many investors and use the funding for a multitude of infrastructure projects. The trust mechanism lowers the amount of risk that investors are taking on, because their money is not focused on one project but rather several different projects, often spaced over a cross section of sectors (for example: sanitation, roads, renewable energy).
The most promising step that the Indian government has taken to encourage international institutional investment has been its implementation of the toll-operate-transfer (TOT) model, which is expected to be a huge success, according to a participant with many years of investment experience in the Indian subcontinent. The TOT model, will essentially take infrastructure assets that are currently operating and generating steady profits and auction them to international investors. The infrastructure projects that are being auctioned off generate annual revenues of ₹2,700 crore and are expected to raise between ₹25,000 to ₹30,000 crore with future annual revenues going to the successful bidder for the next 30 years. Essentially, the TOT model trades in 30 years of future annual flows for a lump sum payment, which it can then use to fund new infrastructure funds that the country direly needs at the moment.
India’s infrastructure needs remain great and there is no doubt that institutional investor are wary of committing their money in order to help fill India’s needs. The steps that have been taken, and the vision that the leaders of many of India’s infrastructure related ministries, however, show that it is possible that India could be catapulted into the future, if its infrastructure gap is filled.
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Hosuk Lee-Makiyama Director European Centre for International Political Economy
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