Infrastructure Development in India: The Way Ahead

Abstract

Infrastructure development is prerequisite in transforming a slow-moving economy into an advanced one. In the Global Competitiveness Index, India’s rank is 70 out of 140 countries for infrastructure quality in the world. As per the recent estimation, to convert the vision of $5 trillion economy into reality, $4.51 trillion needs to be invested by 2030 in building the infrastructure of the country. Great efforts in the form of huge investment in infrastructure is required if we want to convert this dream into reality. The latest Budgetary outlay of Government of India for infrastructure sector of ₹100 lakh crore which is streamlined to be invested on infrastructure over the next 5 years and more than 6,500 projects will boost the economic development of the country. Infrastructure industry encompasses sectors such as social and commercial infrastructure, communication, energy, transport and water sanitation.

This article is an attempt to study the public private partnership (PPP) model in infrastructural development in India. This research article has six sections as follows. Section 1 aims at defining the importance of infrastructure for economic growth of the country. Section 2 provides the discussion on PPP model. Section 3 explains the review of literature. Section 4 represents the research problem and research question followed by discussion and possible solutions in Section 5 and, finally, Section 6 of the article represents the conclusions and the limitations along with the direction for future research.

JEL Classification: M48, R42, F65, G32

Keywords

PPP (public private partnership)GOI (Government of India)infrastructure bond market financial market economic growth

1. Introduction

Infrastructure industry plays a pivotal role in every economy because of its expected large economic and social impact. Infrastructure is the backbone of an economy. Efficient infrastructure is a precondition for market development and growth output. For an emerging economy like India, good amount of investment in Infrastructure will be required to accelerate the growth of the economy. Substantial literature exists for the importance of sound infrastructure for the economic growth (Calderón and Servén 2004; Canning and Pedroni 2004, 1–30; Fedderke et al. 2006, 1037–59; Sahoo and Dash 2009, 351–65; Srinivasu and Rao 2013, 81–91).

This research article is exploratory in nature briefing public private partnership (PPP) model in India for infrastructure development and providing suggestion to enhance the private participation in development of infrastructure to handle the deficit in infrastructure financing. Relevant government reports, articles of relevant journals and reports of concerned industry have been considered to draw the conclusion.

2. Public Private Partnership Model

For the development of public sector infrastructure, PPP model has emerged as an efficient and sustainable strategy. With the collaboration of technology, financial resources, innovative and improved management techniques PPP model has potential to contribute to the development of economy along with raising the productivity. Government is realising the importance of PPP in infrastructure sector to accelerate the infrastructure development. The Union Finance Minister, in her budget speech 2019–20, emphasised the need for a review of the PPP model for infrastructure development and improved PPP models and agreements with more balanced risk-reward sharing.

2.1. What is Meant by PPP Model?

As defined by the PPP Knowledge Lab, ‘Public private partnership is a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management, responsibility and remuneration is linked to performance’. As defined by Ministry of Finance, Government of India, ‘PPP is a partnership between a public sector entity for the creation and management of infrastructure for public purpose for a specified period and in which the private partner has been procured through a transparent and open procurement system’.

PPP arrangements facilitate the infusion of private funds into public work (Chou et al. 2015, 204–11) reduces the fiscal burden of governments.

In the last 30 years various kind of project have been successfully executed with the PPP arrangements (Bult-Spiering and Dewulf 2008).

The main features of PPPs are a willing public participant that needs to provide a better level of service, and savings to the general public, and a willing private participant that is financially stable, and able to provide a more efficient, cost, effective and on time delivery of the project (Bramhankar 2018).

Table 1.

Infrastructure Projects in India from 1991–20.

Total Infrastructure Projects in India	Number of Government Infrastructure Projects (Traditional Procurement)	Number of Government Infrastructure Projects (PPP)
9,242	7,418	1,824

Source: www.pppindia.gov.in

According to Chart 1, in India, a total number of 9,242 infrastructure projects have been implemented since 1991 out of which 80% have been executed by government via traditional procurement model and the rest 20% were executed under the PPP model.

Chart 1.

Source: The authors.

2.1.2. Sub-Sector Trend

Chart 2 shows that the transport sector outpaced all the other sectors in terms of maximum number of PPP projects, followed by energy sector and water sanitation and communication with least number of PPP projects.

Chart 2.

Source: www.pppindia.gov.in

3. Review of Literature

Panigrahi and Beura (2013, 405) in their paper, ‘An Exploratory Study on Infrastructure Financing in India’, emphasised that the major reason for deficit of infrastructure in India is the resource constraint. The author purposes that PPP model is the best model to bridge the gap between infrastructure needs and financing of infrastructure. The author asserts the need of establishing fund for development of innovative infrastructure.

In the study, ‘Identification of Critical Factors Affecting Infrastructure Project Performance in India 2019’, the author designed the survey questionnaire to probe the cross-sectional behavioural pattern of infrastructure projects in India. The main objectives of the study were the identification of critical factors affecting infrastructure project performance in India, identification and prioritisation of performance parameters, development of framework based on factors identified. The author found various factors that influence the performance of infrastructure projects and grouped these factors in six major heads such as cost performance factors, schedule/time performance factors, human related factors, quality performance factors, safety performance factors, environmental factors. The author concluded that cost performance parameters and time/schedule performance have more impact, whereas the other factors such as human, quality, safety, environmental performance parameters have less impact, comparatively. Cash flow management of the organisation, control and monitoring of cost performance, budget estimate of the project, capital structure for raising funds for the project were identified as the top four cost factors/parameters influencing the performance of infrastructure projects in India.

Amongst the time performance factors planning and monitoring, material availability, time estimation of the project were identified as the top three parameters that have major impact on the performance of infrastructure projects in India (Bansal, Ali and Sharma 2019).

Tagariya and Dalvadi 2019, in their study, ‘Measuring Shareholders Returns of Selected Infrastructure Companies in India’, attempted to measure shareholders return of selected infrastructure companies in India through ratios analysis. The study was conducted for the years 2013–14 to 2017–18. The output of this study focused that if the infrastructure industry has to perform well, it has to invest more capital and has to do more work, only then it will improve its performance level.Sahoo and Dash (2009, 351–65), in their study, ‘Infrastructure Development and Economic Growth in India’, employed the causality analysis to show critical importance of infrastructure development in reduction of poverty and growth of economy.

Calderón and Servén (2010) suggested that poor countries attract less private investment in the infrastructure sector, whereas the rich countries on the other hand witnesses more participation of private players in the infrastructure development of the country. Creditworthiness of the state is a critical factor to attract the private investment (Bayliss and Waeyenberge 2018, 577–93; Hart et al. 2015; Trebilcock and Rosenstock 2015, 335–57).

4. Research Problem

Longer gestation period is the major reason behind why banks are not willing to invest in infrastructure projects (Panigrahi and Beura 2013, 405–8). Bond market in India is also not fully developed to raise fund for infrastructure projects (Lam, Chiang and Chan 2011, 190–9). Since the independence of the country, government being the major fund provider for the infrastructure projects. With global competitiveness, the demand for infrastructure increases, policy makers realised the potential of private players to participate in the infrastructure development of the country. To reconcile the objectives of the various stakeholder, involve in the PPP model, makes the structuring process of PPPs cumbersome and complex. In order to sustain private capital in key sectors such as infrastructure, enhancing the enforceability of contracts, timely resolution of disputes and predictability in execution is critical. For the emerging economies, formulating the appropriate measures and strategy to promote PPPs is a challenge (Chou et al. 2015, 204–11)

4.1. Research Question

These are the following two research question:

Why private participants are reluctant to invest in infrastructure sector in India through PPP model and what can be the possible solution to enhance private participation in the infrastructure development of the country.

What are the factors causing failure of PPP arrangements?

5. Discussion

Not all PPPs are successful, some turned to be a failure. Ignoring institutional framework while framing PPPs policies being the major reason behind such failures (Chou et al. 2015, 204–11; Dutz et al. 2006; World Bank 2007).

This collaboration or partnership is based on each partner’s experience in meeting clearly defined public requirements by allocating resources, risks, responsibilities and rewards appropriately. Any PPP contract’s risk allocation is more complicated than that of a traditional construction project.

One of the key challenges in implementing PPP projects in India is a lack of capacity in the public sector. Many explicit and implicit liabilities may be imposed on the government as a result of PPP initiatives. On several occasions government failed to create a conducive operating climate for the private sector to perform at its best. In developing nation like India, the root causes behind failure of PPP model is lack of trust between public and private sector and the public sector’s lack of skills in dealing with private sector (Sharma and Bindal 2014, 1270–4). Previously scholars have worked to identify the factors behind failure of PPP projects and reasons were identified for the reluctance of private players to participate.

Table 2.

Studies on the Deterring Factors for Private Participants.

Factors Identified	Authors
Lack of trust, unmanageable risk	(Tam 1999, 377–82)
Lack of transparency in policy and strategy formulation of PPPs by government	(Chou et al. 2015, 204–11)
Difficulty in obtaining financial partners	(Carrillo et al. 2008, 138–45; Chan et al. 2010, 30–40)
Poor Knowledge management in the policy-making process	(Chou et al. 2015, 204–11)
Lack of government support	(Hwang, Zhao and Gay 2013)
Political and regulatory risk	(Burger et al. 2009)
High penalty cost associated with missing construction targets
Reputational risk	(Demirag et al. 2011, 294–310)

Source: The authors.

5.1. Possible Solution

Governance, macroeconomic stability and transparency in regulations are identified being the major factor responsible for the performance of PPP projects (Sharma 2012).

As defined by Jacobson and Choi (2008), mutual trust amongst stakeholders, open communication and collaboration are the factors determine the success of any PPP. Chou et al. (2015, 204–11) argue that institutional framework is critical to stimulate private investment into public work. Participative approach should be followed for establishing strategic governance model for effective management of PPPs.

To ensure the financial viability for the infrastructure projects that are developed under PPP model either direct support in the form of grant or debt investment can be provided by the government. Lack of consistency in policy formation for infrastructure development is the major reason for financing deficit of infrastructure projects in India. In order to sustain private capital in key sectors as infrastructure, enhancing the enforceability of contracts, timely resolution of disputes and predictability in execution is critical. A balanced approach should be applied while framing the contract with respect to sharing of risk and responsibility. A well-executed project planning and development process also provides for improved option screening and aids in the selection of an appropriate project structure and technology based on cost over the project’s whole life cycle.

6. Conclusion

For the infrastructure firms, success revolves around stitching a credible financing plan. Banks and other financial institution alone cannot meet the future funding requirements of the infrastructure sector hence new innovative avenues of raising capital should arise. For the development of public sector infrastructure, PPP model has emerged as an efficient and sustainable strategy. With the collaboration of technology, financial resources, innovative and improved management techniques, PPP model has potential to contribute to the development of economy along with raising the productivity. Government is realising the importance of PPP in infrastructure sector in order to accelerate the infrastructure development. Company regulation rules should be amended by Ministry of Corporate Affairs to make mandatory for the big corporations to invest at least some percentage of their earnings for the infrastructural development of the country. Enhanced role of financial market in providing fund for infrastructure projects can be game changer in India.

6.1. Limitations and Direction for Future Research

The study has been specifically conducted for the role of PPP model in the development of infrastructure of the country. It can be further conducted for specific sector under infrastructure. Future research can be carried out to investigate the factors contributing to the success of the PPP Projects in India.

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.

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