The combined pressure from civil society organisations, greater numbers of quality-conscious citizens, a vociferous media and the need to progress with Millennium Development Goals related to affordable access to basic services has motivated the government to encourage private participation. Private players, of course, tend to focus on sectors where there is a clear conception of user cost — which can be easily realised — and many prominent civil society organisations, public interest groups and media outlets repeatedly question the integrity of private players in rendering crucial public services.

Relying on private participation also heightens the danger of inordinate tariff increases and reckless layoffs. But these negatives are usually apparent at the beginning of the process, when the government is searching for private investors. Instead of addressing these concerns, the government’s ‘faulty, rushed, non-competitive and non-transparent’ application of policies is driving out healthy competition.

With a dire need to develop new financing and institutional mechanisms to plug the glaring infrastructure gaps, the Indian government has largely come to accept that access to supplementary capital funding from the private sector is a notable advantage of private participation. Reduced delays in the implementation of projects, lower lifecycle costs and greater accountability are seen as other advantages. Since the 1990s, the government has actively encouraged private investment in infrastructure, as it estimated that serious infrastructural bottlenecks deprive the country of 1–2 per cent GDP growth every year. For example, the Economic Survey of India estimates that 12 per cent of power shortages at peak levels and 8 per cent at non-peak levels represents a loss of US$3.4 billion in generational capacity, which is equal to a GDP loss of US$68 billion, and seriously undermines India’s global competitiveness. Under these circumstances, increased private sector participation is the only solution to bridging the appalling gaps in India’s infrastructure.

The Indian government has endeavoured to attract private investment by instituting mechanisms which encourage both public and private investment and public-private partnerships (PPPs), with the latter considered the preferred model for constructing and operating infrastructure projects. As a result, India has witnessed some progress in attracting private participation for infrastructure projects. This has largely taken place through the corporatisation of existing public sector utilities; the development of new projects via greenfield investment; the adoption of build, operate, transfer or build, own, operate, transfer formats for PPP projects in the road sector; and through various concession deals.

India’s Eleventh Five-Year Plan had the ambitious target of increasing the total investment in infrastructure from about 5 per cent of GDP in the Tenth Five-Year Plan to 9 per cent of GDP. In absolute terms, this implies an increase from Rs.9060 billion in the 10th plan to Rs.20542 billion during the 11th plan. This has led to the projection that 30 per cent of India’s financial needs for infrastructure initiatives will be met by private sector participation during the 11th five-year plan period (2007–12). Private investment in infrastructure totalled Rs.2252 billion in the period covered by the 10th plan, and more than trebled during that of the 11th plan to Rs.7429 billion.

The sheer number of PPP projects is increasing across India as well. As of December 2009, 241 PPP projects with a total investment of Rs.666.27 billion were completed, and 292 projects with a total investment of Rs.2411 billion were under implementation. Another 412 projects involving a total investment of Rs.3765 billion were in the pipeline. These projects are comprised of investments in all kinds of infrastructure from national highways, state highways, airports, ports, power generation, transmission and distribution.

Even with the sustained importance given to PPPs in India’s five-year plans, the private sector has not responded with any particular enthusiasm. It is greatly inhibited by overlapping regulatory jurisdiction and sub-optimal risk allocation mechanisms under the PPP model, with transparency, and cost and time over-run issues also creating problems. Many experts support the creation of a centralised PPP mechanism and a single point of clearance for proposed projects. Financial markets are inadequately developed in India, which currently leads to PPP projects depending on commercial banks for funding. This exposes the investors to risk concentration, maturity mismatches, and rising interest rates and tightening credit conditions over the life of the project.

In spite of taking significant steps to encourage private players to invest, the field has only recently started to gain momentum in India, especially when compared to other emerging market economies. India stands fourth after China, Brazil and Russia when it comes to attracting private investment in infrastructure. Telecommunications, energy and the transport sector have secured the most private investment, with 49.6 per cent, 28.9 per cent and 21.3 per cent private participation, respectively. But these figures fall abysmally short of what is required to develop basic infrastructure services in India.

The private sector’s response has been relatively lacklustre, and projects have faced various implementation challenges like tariff setting and adjustments, regulatory disputes, ambiguous contracts, the hasty allotment of contracts leading to re-negotiations, and unequal risk sharing. There is a serious dearth of transparent investor friendly policies and procedures. The PPP model is not necessarily suitable for all infrastructure projects, but where it is appropriate, the model needs to include effective regulation, liberalised labour laws, smart corporate governance and create sustainable project revenues. If India is to bridge the current gaps in infrastructure — and extend the provision of basic services to a greater proportion of its population — the country urgently requires more realistic planning in a stable macroeconomic framework, with transparent revenue flows and risk-sharing agreements. It must be remembered that profitability alone cannot determine a project’s viability. There has to be a genuine meeting point somewhere between the public and the private sector.

Nabeel A. Mancheri is a Postdoctoral Associate at the National Institute of Advanced Studies, Bangalore. 

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Ideas from India’.