by Joel Sam, Contributing Editor
In 2016, the World Economic Forum described India as at “an infrastructure crossroads”: As the growth of the economy has taken its toll on critical infrastructure systems, the capacity of the nation’s infrastructure has been dwarfed by the demands being placed upon it. In and around India’s special economic zones (SEZs), where economic activity (as measured by exports) has grown 18 percent in the past 5 years, the needs and demands are particularly unrelenting. The result is what economists call an infrastructure gap. If it remains unfilled, it threatens to undermine economic and social development. However, the need for infrastructure is creating an opportunity for investors and companies able to play a part in the provision of new roads, railways, sanitation and utilities.
Trillion dollar question: Addressing delegates at a seminar in Beijing, in June 2016, India’s Finance Minister, Arun Jaitley, described India’s infrastructure gap as “huge” and he went on to outline the scale of India’s infrastructure needs: “Over the next decade, we require over US$1.5 trillion in India alone to fill up the infrastructure gap,” he estimated. The seminar, entitled “Infrastructure and Global Economic Growth” served as a platform for the minister to put forward a wide-ranging modernisation plan which would include building roads to connect hundreds of thousands of villages for better access to healthcare, education and economic opportunities. SEZs have long been conceptualised as the potential link between India’s rural and urban economies, but the lack of integrated infrastructure has prevented this from becoming an impactful reality.
The roads ahead: The government’s road-building initiative is a step in the right direction, claims the Finance Minister. “In terms of highway construction, this year alone our target is 10,000 km. Our railway system is over one hundred years old. We are going in for a massive modernisation,” he told reporters and delegates. For example, a project such as the Metro-3 corridor, the first underground metro line in Mumbai, one of India’s major coastal cities, demonstrates a policy strategy of integrating SEZs and surrounding areas, which should improve efficiency as well as capacity. The rail project, also known as the Colaba-Bandra-SEEPZ line, will connect six business districts, 30 educational institutes, 30 recreational facilities and domestic as well as international airport terminals throughout Maharashtra’s capital city. According to the Mumbai Metro Rail Corporation (MMRC), the 33.5km line will cost approximately US$3.4 billion and join up the Santacruz Electronics Export Processing Zone (SEEPZ) to the business districts of Colaba, BK Complex, Worli, Cuffe-Parade, and MIDC, as well as upcoming SEZs that have been proposed in Bandra West. The state of Maharashtra is currently home to more than twenty operational SEZs, with an even greater number at different stages of approval, according to Ministry of Commerce and Industry data.
Public leadership: The government has announced a target of investing US$377 billion in infrastructure in the three years from 2017 to the end of 2019, equal to the total amount which the country attracted in foreign direct investment (FDI) between April 2000 and May 2015, according to figures from its Department for Industrial Policy and Promotion. The use of state finances will be unavoidable, admits, Finance Minister Jaitley. “We realise that [the] starting point is public finances. It is only when the public finances are put into it, you start attracting and the activity begins a lot of private funds”. In addition, India’s status as a developing nation means she is often a recipient of development assistance from governments around the world and multinational institutions, such as the World Bank and Asia Development Bank. For instance, funding for the multi-billion dollar Metro-3 is split between state and federal budgets and a soft loan of roughly US$1.9 billion from the Japan International Cooperation Agency (JICA), the Government of Japan’s independent development finance institution.
However, the Government of India hopes private sector investors will see an infrastructure boom as an opportunity. While a public-private partnership (PPP) model has been the prevailing structure for private investment in infrastructure, the results have been mixed in recent years. “The tangible signs of this are a large number of incomplete and stalled projects, which are doing nothing to enhance the economy’s infrastructure capacity and a massive build-up of non-performing assets (NPAs) on the balance sheets of the country’s banks,” writes Subir Gokarn, a senior fellow at the Brookings Institution India Center, a non-profit public policy think tank. An effort to revitalise the PPP structure is underway, but tangible improvements are yet to be seen.
Private opportunity: In an August 2016 report, McKinsey Global Institute listed urban Infrastructure as one of the five top opportunities for both domestic and global companies interested – or already operating – in India, adding that public and private infrastructure investments will improve returns on investment in other areas, such as manufacturing. Construction data from the India Brand Equity Association suggests that the construction equipment sector has already seen growth, potentially on account of greater infrastructure investment. During January 2016 to May 2016, India’s construction equipment industry recorded sales of 21,869 units of equipment, representing growth of 47.6 percent over the same period previous year.
Private sector investment can also help to drive innovation in infrastructure, through the use of smart technologies, networked infrastructure services, and fully harnessing the possibilities created by digital technologies. Nowhere might this be as powerful as in India’s SEZs, where more than 1.5 million employees and US$54 billion of cumulative investment are being channelled to produce US$68.6 billion in annual exports. Indeed, the potential of businesses in India, and particularly SEZs, to break into international markets, attract new streams of capital and know-how, and increase delivery capacity, is what makes India an attractive destination to long-term global infrastructure investors, according to the World Economic Forum. Perhaps because of the extended time-horizon of infrastructure investments, state investors have been most vociferous in registering their interest. The United Arab Emirates, for example, has sounded out the possibility of a bilateral infrastructure investment fund worth $75 billion.
The path for private sector infrastructure investment is not always straightforward. Limited access to finance, protracted bureaucracy, and tight margins on public contracts (due to highly competitive bidding rounds) are among the major challenges. However, for the committed investor, the rewards are potentially as abundant as the opportunity.