Abstract
Infrastructure has a strong, positive correlation with economic growth, making it a preferred instrument for the government to achieve post-pandemic economic recovery. Other large economies too are similarly investing in infrastructure. Indian projects will thus need to compete with other global projects for financing, investors, technology and developers. It is therefore necessary to improve the attractiveness and marketability of India’s infrastructure projects by reducing risks and improving visibility of projects. With increased competition and changes in the environment, the risks of future cash flows from infrastructure investments have increased manifold. This paper examines the perceived risks in the entire lifecycle of infrastructure projects from infrastructure planning to project planning, bidding, implementation and operations along with best practices in each area. A long-term vision for the infrastructure development will provide visibility to projects for the current National Infrastructure Pipeline. The development of the entire project delivery ecosystem requires initiatives in capacity building in the technical, financial and entrepreneurial resources, and engagement with project affected people. Other desirable outcomes of infrastructure investments, for example, job creation, sustainability and reduction in disparity are also discussed. The paper presents a perspective for revitalizing infrastructure development in India so that its efficacy for post-pandemic economic recovery is enhanced.
Keywords
Preamble
Infrastructure projects are characterized by large investments with long and uncertain pay-back period. 1 They also require high techno-commercial and execution capabilities, significant upfront costs of bidding, contracting and input cost fluctuations; and therefore, carry considerable risks for the investors and developers. At the same time, the promise of a stable demand, monopolistic markets and stable returns over long-term make them attractive. After economic liberalization 1990s, India has enjoyed high growth in both GDP and infrastructure Investments, but project delays and cost overruns 2 have also been common (Nataraj, 2014; Parthasarathi & Aryasri, 2014). The speed of technological obsolescence (e.g., Telecom Technologies) as well as new substitutes (e.g., Bullet Trains in transport) have increased risks, changing their risk reward balance and marketability.
Infrastructure has a strong, positive correlation with investments and economic growth. Therefore, governments globally, including India, are planning infrastructure investments for post-pandemic economic recovery. In the post Covid-19 pandemic world, there’s now a greater emphasis on reducing risks in businesses and need for resilience (Bryce et al., 2020; Gössling, 2020; Hynes et al., 2020). As India plans additional investments in Infrastructure, it must also address the systemic weaknesses (e.g., in infrastructure planning and implementation and building up implementation and institutional capacity)—which increase the perception of risks and reduce attractiveness of infrastructure projects. Thus, there is an urgent need to review the Infrastructure projects from an overall risk perspective to improve its attractiveness for investment and development partners.
Infrastructure Assets: The Changing Landscape
Immediately after independence in 1947, the development of the infrastructure was fundamental to India’s economic growth as it provided much needed and critical inputs to other sectors of economy. Due to dearth of capital and technical know-how with the then under-developed private sector, Government of India reserved most of these industries for the public sector, which were called the ‘temples of modern India’. These public sector undertakings were initially supported by the government created safety net of assured demand in monopoly markets, where the high risks of initial investments were set-off by the stable future cash flows with a reasonable profitability.
The nature of Industry and the asset class has changed significantly since then. Firstly, there is an increased involvement of the private sector in the infrastructure. Infrastructure contracts allow private sector partners to offload (partial) equity to investors over the project duration, with reducing levels of risk perception and consequent higher valuations. The capital freed through these offloads is utilized for taking up new projects by these firms. Thus, even after the project award, the project is likely to be marketed to subsequent investors, requiring risk assessment by new partners who may have differing perceptions of risk (Gupta & Verma, 2020).
Second, over time the risks of technological obsolescence and emergence of competing alternatives have grown multifold. Telecom is one such area, where introduction of newer technologies (2G to 5G) is imperative, and the players unable to do so stand to lose business. Similarly, in transport, newer concepts like Bullet Train compete with air transport demand. Technology, therefore, enables demand disruptions for infrastructure services, affecting their future cash flows.
Third, unlike in case of the public sector, governments cannot allow private sector monopolies. The bidders’ cash-flows have to provide for strong future competitors, who benefit from the learning curve of the earlier incumbents. This competition may also be created unknowingly, due to the lack of the coordination between multiple planning agencies. It is very common for the highway developers to find competing stretches of roads launched by the state governments.
Fourth, Governments have historically been unable to levy user charges for public goods to provide an appropriate economic return, for example, in electricity (Patel & Bhattacharya, 2010). Infrastructure contracts that assume user charges recovery and increase over the project duration (e.g., for toll roads) have to account for significant risks of revenue shortfall in the case of the public outcry against the levy, or its increase. Finally, as the recent pandemic has shown, relatively well-established industries and demands can vanish almost overnight, Hospitality and Travel being recent examples.
Overall, the development and market risks in infrastructure projects need careful balancing with future rewards. Therefore, for successful project delivery, it is important to reduce the risk perceptions associated with infrastructure projects. These are discussed in the following paragraphs. The Kelkar committee 3 recognized the importance of risks assessment and its sharing in the infrastructure projects. It also suggested a framework for renegotiation being built into infrastructure contracts, based on changes in economic and policy environment.
Risk Reduction Through Better Planning and Execution
We can suggest areas of risk reduction in infrastructure projects, from four perspectives: infrastructure planning, project planning, implementation and operations and supporting infrastructure.
Planning of Infrastructure
A pre-requisite for sound infrastructure planning is an agreed vision, like the earlier five-year plans. This vision, developed with consensus and therefore unchanging over long term, can set the direction for planning. The vision can allow a framework within which the central, state and other infrastructure projects are identified and communicated to potential investors, developers and other members of the eco-system. Infrastructure visioning in Japan provides a good example, where the development is led by the central government. However, the Social Infrastructure Council, consisting of academics and experts, discuss the direction of the infrastructure development in order to improve living standards and to develop the national economy, and they submit reports and proposals to the government, who then develop the Five-Year Road Development Plan and implement these after due approvals. This method of formulating a long-term vision through the council discussion has been applied to large-scale infrastructure projects such as roads, ports, airports and rivers, etc. (Nakamura et al. 2019).
The recent National Infrastructure Pipeline (NIP) is one such framework, a listing of all projects, current and planned, to provide visibility to India’s infrastructure project pipeline. We believe the NIP, an excellent start, can be made more effective by making it into a process instead of a listing of projects, wherein the pipeline is only one (important) output of the process. The other elements of this Infrastructure planning process can be:
An overall infrastructure plan, identifying thrust areas, developmental goals and demarcation of state and central responsibilities. This will provide a unified direction to multiple infrastructure development agencies so that concurrent projects are synergistic and the investors too are aware of the direction of future developments. A national register of all infrastructure assets on the lines of Canada’s Core Public Infrastructure Survey (CCPI)
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which can not only list the basic details of the infrastructure assets, but also its useful life and important events, such as major repairs, upgradation and finally replacement, all resulting in additional infrastructure projects. Identifying new/disruptive technologies (5G/Bullet trains) which require consideration to reduce risk of technological obsolescence and provide advance warning. Infrastructure resilience plan, including resilience testing (in view of the recent pandemic shock). Opportunities, like evacuation demand, created by the government for Air India in this pandemic can also be included.
Project Planning
Planning, by nature, is a dynamic process and all elements of it require constant updating. However, bidders may rely on their own assumptions, thereby affecting the project viability, viability gap funding and bidder interest. Participating bidders tend to build this cost variation into bidding, resulting in lower bids. Such variations in project assumptions are, of course, normal and can be either validated by both parties prior to bidding, or included in the project documentation as a formula. Completion of land acquisition prior to bidding, and receipt of necessary local approvals are other areas of risks, which can be countered by the better planning. McKinsey (2009) argued that low investment in the initial planning, where India spends 2% of project costs (compared to 5% in UK and 6–9% in the US), leads to higher project over-runs (24% in India; 6–8% in UK and US). Global practices include Quality cum Cost based selection for project planning, instead of the lowest cost (L1) selection prevalent in India.
Some other best practices include the following:
Putting a ‘Best Before’ date for all techno-commercial evaluations. This will assure that the assumptions used in the analyses are current and valid. Review of critical project parameters and assumptions, immediately before bidding. Completing entire planning before bidding to enable lump-sum contracts (and better cost control) instead of item-rate based contracts, which can sometimes result in cost variations. Allowing periodic revision of critical items of high-price variation (cement, steel, exchange rate, etc.) on an agreed formula in the project documentation. This will transparently record and measure the cost increased due to increase in price of these critical inputs, out of the reasonable control of the project developers and government agencies.
Project Implementation and Operation
Project implementation includes activities from bidding till actual project delivery. The risks include lack of bidder interest, timely availability (within cost) of all inputs, technical and financial capability of contractors and support from external agencies and government departments under an overall program management framework. Report of the Task Force on Project and Program Management in 2019, under the chairmanship of CEO Niti Aayog, also underlines the importance of the overall program management and capacity development within its main suggestions for the project delivery.
The better coordination and contract management can also reduce friction and litigation between project participants, and project owners; another area contributing to delays. Most contracts have Arbitration as a first recourse, but it has been observed that most arbitration awards get contested in courts, thereby defeating the very purpose of the arbitration. Strengthening the dispute resolution structure can greatly help. The Kelkar committee, in its recommendations, suggested better dispute resolution through better articulation of dispute resolution structures within the contracts; as well as setting up independent sector regulators for dispute resolution. Notably, telecom sector already has a regulatory authority TRAI (Telecom Regulatory Authority of India) as well as a separate Telecom Disputes Settlement and Appellate Tribunal.
Long-term project viability and reduction of risks can be achieved by the focus on the catchment, catchment development, involves the development of sub-projects within the main project catchment area which have a synergistic, complementing effect on the main project. For example, the development of an expressway will greatly benefit from the industrial development in its catchment and along its route, which increases traffic through it and improves commercial viability.
Operations and maintenance are important for achieving and extending the useful life of the assets created. A focus on costs of the asset creation sometimes results in decisions that may reduce the upfront costs while increasing maintenance costs or reducing useful life of asset. The use of the concept of the lifecycle costing for projects, covering all costs over the project lifecycle can inculcate discipline of appropriate maintenance and upgradation during its useful life and replacement of the asset thereafter.
Support Infrastructure
A capacity development plans for the entire project delivery ecosystem, including developers, contractors, technical consultants, investors and financiers is need of the hour.
On the funding side, the multilateral developmental institutions have already introduced mixed funding, including the developmental and commercial funding, thus increasing both the available resources and the lenders. Challenges on the project management are recognized by Niti Aayog (2019) suggesting immediate remedial measures through Quality Council of India and National Project/Program Management Policy Framework incorporating global standards and certification, as a long-term goal. Similar initiatives are needed in the technical support area as well.
Infrastructure Development Objectives Setting
Infrastructure investments are a significant part of the national expenditure, and its deployment priorities can remove or increase disparities: regional, income and socio-cultural. The recent Economic survey (FY 2021) argues that for the developing economies, economic growth takes place along with growth in other human development indices and therefore it is important to increase size of the pie, through a sharp focus on economic growth, before the distributional parity in income is attempted.
It can be safely argued that with the prime objective of economic growth, other outcomes, such as job creation, poverty alleviation, capacity/skill enhancement and income distribution should also be included in the objective setting exercise, though different weights may get applied to these. Nakamura et al. (2019) listed nine objectives for the infrastructure development, including safety (e.g., disaster prevention infrastructure), correction of regional disparities, regional and national development, efficiency improvement, etc., apart from the natural demand for infrastructure services.
One way to achieve twin objectives of the employment generation and the capacity development is to enhance the definition of Project-Affected People (PAP) to catchment area population, who are then trained in various trades and employed in the project development, and after project completion in maintenance and operation. This will not only help in the job creation and the capacity development but will also greatly reduce the friction between project developers and PAP.
Another objective, often ignored in the infrastructure planning is the sustainability including economic, ecological, social and cultural aspects. Developing countries, including India, provide more importance to economic sustainability. The Economic Survey 2021 asserts that our sustainable development goals are aligned with our economic goals. As a leading economy of the world, India must demonstrate the achievement of both economic and sustainable goals in the infrastructure development.
Summary and Conclusions
The infrastructure development has strong forward linkages to economic development and can be instrumental achieving post-pandemic economic recovery. While doing so, we must lessen the risk perception of infrastructure projects in India, over entire lifecycle of projects. A large capacity planning exercise is also required. A vibrant ecosystem of infrastructure developers, financiers, technical consultancy and project managers, once created, can become valuable resources for the project delivery.
India will not be alone in its quest for investing in infrastructure for economic recovery. Most countries have already announced plans for the large infrastructure foray. Indian projects will thus need to compete with other global projects for financing, investors, technology and developers. It is therefore necessary to improve the attractiveness and marketability by reducing uncertainties and improving visibility of projects. Development of and rewarding long-term quality partners for project planning, development and maintenance will allow us to build an ecosystem which can reduce the friction with PAPs and at the same time convert these persons into valuable national resources.
Infrastructure projects are large investments of public money and a review of project objectives, and inclusion of sustainability objectives will allow for the comprehensive sustained development of projects.
Footnotes
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.