Comment on “Infrastructure and Connectivity in India: Getting the Basics Right”

Abstract

In India, infrastructure facilities such as roads, railways, ports, power stations, and information and communications technology (ICT) have not been developed sufficiently to catch up with India's rapid economic growth. Inefficient infrastructure has been pointed out as being a supply-side bottleneck. India must improve both its hard and soft infrastructure. The central government doubled its investment in the infrastructure sector from $US 500 billion in the 11th Five Year Plan (2007–2008 to 2011–2012) to $USD 1 trillion in the 12th Five Year Plan (2012–2013 to 2016–2017). But the investment is not enough to meet infrastructure financing. Public–private partnerships (PPP) were encouraged to mobilize more savings from the private sector. Commercial banks and non-banking financial companies (NBFCs) have been the two major source of non-budget debt financing for infrastructure projects. The share of infrastructure in gross bank credit rose from 6% in March 2007 to 11% in March 2011. However, banks face asset liability mismatches because they finance long-term infrastructure loans through deposits of a shorter maturity. Moreover, the share of gross non-performing loans (NPL) and restructured standard advances to the infrastructure sector in total advances to the sector increased from 5.1% in March 2010 to 22.8% in March 2015. Banks are reluctant to extend credit to the infrastructure sector. The total resources of NBFCs are limited because they are not deposit taking institutions. The private sector cannot depend on banks and NBFCs to expand investment in infrastructure projects. Singh and Kathuria (2016) recommend a strengthening of the bond market and mobilizing insurance and pension funds through the bond market to finance private investment in infrastructure. In India, PPP projects fell in the 12th Five Year Plan period. Many projects have suffered large time and cost overruns, and they have been unable to meet expectations regarding transparency and accountability. Many large infrastructure companies have accumulated debt. As the net debt of Indian infrastructure companies increased from 3 trillion rupees in 2010 to over 6 trillion rupees in 2014, private investment in infrastructure decreased from over $US 70 billion to less than $US 20 billion during the same period (Wall Street Journal 2015). While the Ministry of Road Transport and Highways has awarded contracts for 8000 km of national highways in 2014–2015, only about 700 km was awarded on build-operate-transfer (BOT) (Live Mint 2015). Infrastructure development through PPPs has reached a dead end. It seems that infrastructure financing as well as the institution of PPPs might have some problems. Singh and Kathuria (2016) conclude that “the first and foremost goal of involvement of the private sector should be to achieve efficiency gains as compared to purely procurement”. The PPP framework should be rebuilt to promote PPP projects. PPP is a good strategy to construct, operate, and maintain infrastructure facilities efficiently. However, the purpose of private companies is profit maximization. It is not always consistent with the optimization at the national level due to the fallacy of composition. Airport and port projects can attract private investment easily because investors can expect stable international standard income from foreign customers. The private sector might actively invest in infrastructure development in urban areas because it can expect enough income from users to recover the investment. On the other hand, the private sector might hesitate to invest in a sector where it cannot expect enough profits. The private sector can compensate the public sector but it cannot substitute for it. In order to develop infrastructure, the government must take the initiative in both investment and planning. This does not conflict with PPP, but might encourage it. Although huge fiscal deficits have constrained the increase of public investment in infrastructure, investment from the private sector will not be induced without it. The Golden Quadrilateral connecting the four major cities of Delhi, Mumbai, Chennai and Kolkata, and the North-South and East-West corridors have almost been completed. Their costs were funded largely by the government's special petroleum product tax revenues and government borrowing. The project tried to upgrade, rehabilitate and widen major highways. In 2015–2016 the government proposed a hybrid annuity model, which provided fiscal support from the government and took away the traffic risk from the investor. Consequently, the government received more bids in 2015–2016 (Live Mint 2015). Without government support and initiative, the private sector which has accumulated debt will not invest in infrastructure even if they get finance. Second, a master plan for infrastructure should be produced to make efficient logistics from the viewpoint of the national economy and to express sector-wise and area-wise priorities. Scarce government resources should be allocated according to the plan. Priorities expressed by the government may give a good signal to the private sector and encourage investment in the high priority projects. High priority should be given to projects which might reduce logistics costs effectively.