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Infrastructure: PPP is the key! - Views on News from Equitymaster

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Infrastructure: PPP is the key!
Mar 28, 2007

Low spending on infrastructure has been holding back India's average growth with the actual amount spent being miniscule compared to the requirement. The gap is evident in almost all areas of infrastructure, including roads, airports, seaports, railways, electricity and industrial clusters/estates. Lack of reforms led to stagnant investments between FY98 to FY03. Political scenario, no private-sector investment, lack of funding for new projects and government regulations did not encourage investments in infrastructure. Fresh investments were led by government spending, which was constrained by its huge fiscal deficit and lack of alternate means of financing the infrastructure. Also the private sector did not participate in the infrastructure segment mainly due to unfavorable regulations and higher interest rates. Moreover, funding infrastructure projects was a major issue for the private sector. As a result, barring a few exceptions in the power and port segments, the private sector was largely inactive.

However, the government in the last couple of years has become increasingly aware that to sustain the economic growth at an annual rate of 8%, infrastructure development will have to play a very important role. Concomitantly, investment in infrastructure is estimated during the Seventh Plan period (2007-2012) has been pegged at US$ 320 bn (Source: Committee on Infrastructure, Government of India).

Infrastructure investment required (2007-12)
  (US$ bn) %
Airports 9 2.8
Railways 12 3.8
Ports 12 3.8
Roads 48 15.0
Power 200 62.5
Others 39 12.1
Total 320 100

Fiscal deficit and increased spending in the social sector, which affects the investment in infrastructure, has to necessarily be supplemented by public-private partnerships (PPPs) and in many cases exclusive investment by the private sector. To sustain the growth, additional 2.5% to 3.0% of the GDP spending is required to be invested in infrastructure. Hence, the need for the private sector investment is inevitable.

Seeing the bad state of the government finances, private sector has to play a very pivotal role in development of infrastructure. As long as public investment remains robust, the private fixed investment would continue flowing. While public sector reforms in the power and highways sectors are gathering pace, it is inducing a large pick-up in private sector capacity expansion in the production of power generating equipment, cement, transport, and construction machinery sectors.

India has the fifth highest value of PPPs of any developing or transition country but one of the lowest as a share of GDP. Until recently, greater part of the investment is done by the public enterprises with no private participation. Much of the private investment in India has arisen in the past five years at a CAGR of 22.6% in the period FY00 to Fy05, as compared to 22.2% CAGR between FY91 to FY05.

Global public-private partnership (PPP) deals
Country US$ bn % GDP
Brazil 174 32
China 72 4
Mexico 70 10
India 51 8
Malaysia 48 41
Philippines 36 37
Indonesia 32 13
Thailand 29 18
Colombia 20 22

We believe that going forward infrastructure development will be across sectors, and will witness investments by both public and private sectors. Private-sector participation (PPP based projects), in particular, would increase dramatically over the next few years. Growth is likely to be driven by acceleration in investment spending and stable consumption growth. The power generation, cement, capital goods, and construction equipment and services sectors are on the radar of investment spending and growth.

Though the public sector will continue to be the major source of funds for investments in infrastructure, active participation from private sector would be imperative. However, reforms on institutional and political level will be needed to let the private investment be an important player in the development of infrastructure.

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