While many countries in the West are saddled with aging infrastructure and struggling to undertake complex upgrades, India is in full-on build-out mode. However, despite a 2.2-times increase over the last three years, India’s infrastructure spending represents just 4.1% of its GDP. China, meanwhile, is investing 6-7% of its GDP. That means India needs to invest as much as $1.4 trillion just to close the infrastructure gap. The challenge, then, is to drive a substantial increase in infrastructure investment. Private funds can play a key role in this effort.
GoI has announced ambitious plans to spur investment in infrastructure. The National Infrastructure Pipeline and the National Monetisation Pipeline outline more than $80 billion of opportunities for the private sector. A key tenet of these plans is the privatisation of operational assets under a concession framework – that is, limited-duration ownership. This will help the government unlock value to reinvest in new greenfield infrastructure or reduce the fiscal deficit. The infrastructure privatisation effort will require significant investment from private funds, as well as from strategic investors. With a long history of investing in Indian infrastructure, private funds have invested over $150 billion since 2016 alone.
Privatisation can generate a host of benefits to consumers, markets and the economy. As with the private roads project, they can lead to substantial job creation, as opposed to job losses. In addition, through the breakup of large – and, in some cases, unwieldy – organisations, privatisations can encourage a more entrepreneurial mindset across the smaller businesses created as a result.
Finally, when funded through private investors with experience in these businesses and assets, these projects can also benefit from efficiencies and global best practices. This can lead to faster technology adoption and better health and safety procedures, among other improvements.
A prime example of such a programme is India’s roads privatisation, which has consistently attracted private capital over the last 20 years. Under the Toll-Operate-Transfer (TOT) initiative, GoI has raised over ₹300 billion over the past five years. The privatisation effort has yielded benefits beyond just the capital raised and has created thousands of jobs by establishing new head offices for each of the platforms that otherwise would have been managed solely under the National Highway Authority of India (NHAI) umbrella. It has also resulted in the implementation of the FastTag online toll system, app-based reporting of unsafe road conditions, and thousands of hours of training aimed at reducing traffic accidents.
Privatisation, of course, has its detractors, the proverbial ‘selling the family silver’ being the most standard one. The fact is that privatisations can lead to the creation of a lot more ‘silver’. In India’s case, the public sector stands more to gain in owning a share of something with the potential for immense growth in value nudged by privatisation.
Critics have also argued that selling assets at a higher equity cost of capital is more expensive than raising debt. If it were that simple, however, infrastructure around the world would be funded by government-backed debt, thereby defeating its main purpose: to avoid using the sovereign balance sheet and dialling up the sovereign risk. Even if such debt were raised by public sector undertakings (PSUs), GoI, as the largest shareholder, would still be bearing the risk. What’s more, that debt, in most instances, would still be counted as a government liability, negatively impacting the credit rating.
With privatisations, GoI’s goal is to raise capital to reduce public debt, or bring down the fiscal deficit. Regulatory restrictions make it difficult to pass on any debt proceeds from the PSU to the government as a shareholder. In contrast, GoI and other shareholders can realise the proceeds from the sale of an asset as special dividends and through other mechanisms.
A successful privatisation requires effective planning and implementation. Luckily, India has already established models that have worked, such as the aforementioned road privatisation programme. Indian strategic investors can participate across the spectrum, including in greenfield build-operate-transfer (BOT) projects of NHAI. And sovereign and pension funds can participate as minority investors in government-sponsored infrastructure investment trusts (InvITs). Another example is the airport regulatory model, which provides for fixed returns on a regulatory asset base.
Similar to how promoters drive strategic decisions for companies, GoI is taking the lead in divestments, and its effort steadily picking up steam should be visible soon. In this context, India’s low current volume of private investment in infrastructure compared with that of other countries isn’t due to a lack of interest or lack of precedents. The demand, to a large extent, is limited by the supply available. Once that constraint is removed, investors in private infrastructure funds should be more than keen to answer GoI’s call to unlock a developed India by 2047.