“The link between infrastructure and economic development is
not a once and for all affair.
It is a continuous process; and progress in development has to be
preceded, accompanied, and followed by progress in
infrastructure, if we are to fulfill our declared objectives of
generating a self-accelerating process of economic development.”
Dr. V. K. R. V. Rao [noted Indian economist, early 1980s]
“The link between infrastructure and economic development is not a once and
for all affair.
It is a continuous process; and progress in development has to be preceded,
accompanied, and followed by progress in infrastructure, if we are to fulfill our
declared objectives of generating a self-accelerating process of economic
development.”
1 Introduction
In this report we examine the key driver of the economy, Infrastructure is the hallmark
of economic development as the mega structure of the nation’s overall wealth hinges
on it. But the fast growth of the Indian economy in recent years have placed stress on
physical infrastructure such as electricity, railways, roads, ports, airports, irrigation,
urban and rural water supply and sanitation, all of which already suffer from a
significant deficit. Infrastructure development will help create a better investment
picture. To develop infrastructure in the country the government is expected to review
issues of budgetary allocation, tariff policy, fiscal incentives, private sector
participation and public private partnerships. There are many issues that need to be
addressed in different infrastructural fields. To begin with, the gap between electricity
and demand is affecting both manufacturing and overall growth. Another concern is
the transport sector; while road transport is the backbone of the Indian transport
infrastructure, it is inadequate in terms of quality, quantity and collectivity. Further
more civil aviation and ports desperately needs modernization. It is expected that the
public sector will continue to play vital role in building transport infrastructure.
However the resources they need are much larger than what the public sector can
provide.
2 Infrastructure in India
Adequate investment in infrastructure development is a prerequisite for higher
economic growth. Due to low investment in infrastructure development, India suffers
from a huge infrastructure deficit. The average infrastructure investment in India
during the period 1992-2010 constituted 4.7 per cent of the Gross Domestic Product
(GDP) as against 7.3 per cent across countries like China, Indonesia and Vietnam.
Further, as per the World Economic Forum Global Competitiveness Report 2014,
India ranks 85 out of 144 countries in terms of infrastructure quality with ‘inadequate
supply of infrastructure’ listed as the most difficult factor in doing business.
According to the report, India’s infrastructure rankings vary from 84 in quality of
roads to 111 in quality of electricity supply.
3 Infrastructure Development in the
Eleventh Five Year Plan
The Eleventh Plan (2007-2012) laid considerable emphasis on increasing the
investment in physical infrastructure. The Plan envisaged to increase the infrastructure
investment from about 5 per cent of GDP during the Tenth Plan to about 9 per cent in
the terminal year (2011-12) of the Eleventh Plan. Further, the contribution of the
private sector in infrastructure investment was expected to rise from about 22 per cent
in the Tenth Plan to about 30 per cent in the Eleventh Plan.
Infrastructure investment during the Eleventh Plan is Rs.23,74,307 crore (at current
prices), which is 2.8 times the investment of Rs.8,37,159 crore realized in the Tenth
Plan (2002-2007). The actual investment in infrastructure as a percentage of GDP in
the Eleventh Plan increased to 7 per cent. This notable performance was largely
contributed by private investment, resulting in the share of private investment
increasing from 22 per cent in the Tenth Plan to 37 per cent in the Eleventh Plan.
4 Infrastructure Development in the Twelfth
Five Year Plan
The Twelfth Plan (2012-2017) was formulated in the backdrop of this remarkable
performance of infrastructure sector during the Eleventh Plan. The Plan projected an
investment of Rs.55.75 lakh crore (at current prices) in infrastructure during the Plan
period (2012-17), which is more than double the investment in infrastructure achieved
in the Eleventh Plan period. Further, the Plan adopted a strategy of encouraging
higher private investment in infrastructure, directly and through public private
partnerships (PPPs). The share of private investment in infrastructure was projected to
rise substantially from 37 per cent in Eleventh Plan to about 48 per cent in the Twelfth
Plan.
However, experience in the first two years of Twelfth Plan suggests that the
infrastructure investment has slowed down and there is a likely shortfall of about 30
per cent, with the shortfall in public investment (central and states combined) and
private investment at 20 per cent and 43 per cent respectively.
Further, market indications suggest that this slowdown will continue in 2014- 15.
Thus, there has been significant downward trend in the infrastructure investment
during the first three years of the Twelfth Plan which has been due to sharp decline in
the private sector investment.
The Economic Survey 2014-15 also states that India’s investment has been much
below potential over the last few years. The rate of growth of gross fixed capital
formation has plummeted from a peak of 24 per cent in the last quarter of 2009-10 to
around zero in third quarter of 2014-15.
The Survey further points out that the leading reason for slowdown in the investment
in the last few years has been “stalling of projects”. The stalling rate of projects has
increased at a high rate in the last five years, and the rate is much higher in the private
sector projects. Further, the stalled projects are dominated by infrastructure and
manufacturing projects and is severely affecting balance sheets of corporate sector
and public sector banks, which in turn is constraining future private investments.
Further, the Survey states that the expectation that the private sector will drive
investment may not fructify and the public investment may need to step in to recreate
an environment to crowd-in private sector investment. Simultaneously, efforts must be
made to revitalise the PPP model to attract private investments in infrastructure. The
Union Budget 2015-16 has also emphasised on the need to revisit and revitalise the
PPP mode of infrastructure investment.
5 Budget 2015
A big push for infrastructure sector with a hefty 70,000 crore increase in
investment, to pump the economy even though it means postponing by a year
to 2017-18 achieving the stiff fiscal deficit target of 3 percent.
The government has increased outlays on both the roads and the gross
budgetary support to the Railways by 14,031 crore and 10,050 crore,
respectively.
The capital expenditure of the public sector units is expected to be 3,17,889
crore, an increase of approximately 80,844 crore over RE 2014-15, he said.
The government also plans to establish a National Investment and
Infrastructure Fund (NIIF), and find money to ensure an annual flow of 20,000
crore to it. This, he said, will enable the trust to raise debt and invest in equity
of infrastructure finance companies such as the IRFC and NHB and the
companies in turn can then leverage this extra equity manifold.
To augment the power generation capacity in the country, five new ultra mega
power projects each of 4,000 MW in the plug-and-play mode.
Pitching for corporatisation of state-run ports in the country
India has 12 major ports including Kandla, Mumbai, JNPT, Marmugao, New
Mangalore, Cochin, Chennai, Visakhapatnam, Paradip and Kolkata which
handle 61 percent of the country's cargo.
For the roads sector, plans to connect each of the 1,78,000 unconnected
habitations by all-weather roads.
This will require completing 1,00,000 km of roads currently under
construction plus sanctioning and building another 1,00,000 km of roads.
He further said that the Northeast region has been accorded priority in the
development process by two visits of Prime Minister and launch of important
infrastructure projects.
6 Public-Private Partnership
The expression public-private partnership is a widely used concept
world over but is often not clearly defined. There is no single
accepted international definition of what a PPP is (World Bank,
2006). The PPP is defined as “the transfer to the private sector of
investment projects that traditionally have been executed or
financed by the public sector” (IMF, 2004). Any arrangement made
between a state authority and a private partner to perform functions
within the mandate of the state authority, and involving different
combinations of design, construction, operations and finance is
termed as Ireland’s PPP model. In UK’s Private Finance Initiative
(PFI), where the public sector purchases services from the private
sector under long-term contracts is called as PPP program. However,
there are other forms of PPP used in the UK, including where the
private sector is introduced as a strategic partner into a state-owned
business that provides a public service.
The PPP is sometimes referred to as a joint venture in which a
government service or private business venture is funded and
operated through a partnership of government and one or more
private sector companies. Typically, a private sector consortium
forms a special company called a special purpose vehicle (SPV) to
build and maintain the asset. The consortium is usually set up with a
contractor, a maintenance company and a lender. It is the SPV that
signs the contract with the government and with subcontractors to
build the facility and then maintain it.
Thus, the PPP combines the development of private sector capital
and sometimes, public sector capital to improve public services or
the management of public sector assets. The PPP may encompass
the whole spectrum of approaches from private participation
through the contracting out of services and revenue sharing
partnership arrangement to pure non-recourse project finance, while
sometime it may include only a narrow range of project type. The
PPP has two important characteristics. First, there is an emphasis on
service provision as well as investment by the private sector.
Second, significant risk is transferred from the Government to the
private sector. The PPP model is very flexible and discernible in
variety of forms
7 Current status of Public-Private
Partnership
Public-Private Partnership would bridge the gap between investment and service
delivery in infrastructure. This would also require more rules to be played by private
sectors and appropriate regulatory mechanism. It describes a government service or
private business venture which is financed and operated through the partnership of
government and one or more private sector company. Provision of the public services
has conventionally been the domain of the government. With the increase in the
population, urbanisation and other development taking place. The governments abiltiy
to adequaltely address the public needs through conventional source has been
deteriorating at an alarming rate. PPP plays a vital role for infrastructure sector as
enchanced quality and quantity of infrastructure services is acquired and provides
value for the tax payer as well as wider benefits to the economy. In India the PPP
projects include urban infrastructure such as airport, ports and railways, roads, health,
water supply and sanitation and have extended their focus on schools also. Recently
both the central and the state government have successfully harnessed PPP in road
development. Currently several private partnership initiatives are under implimentaion
across India. The scope of this initiative in healthcare services span from disease
survellience to bulk purchase and distribution of drugs, recruiting specialists for high
risk pregnancies, national disease control panel. Social marketing adoption and
manangement of primary health centres, etc. The PPP India database ( department of
economic affairs and ministry of finance)