While many Western countries struggle with aging infrastructure and struggle to undertake complex upgrades, India is in the midst of the construction phase. However, despite a 2.2x increase over the past three years, India’s infrastructure spending is only 4.1% of its GDP. China, on the other hand, invests 6 to 7% of its GDP. This means that India needs to invest up to $1.4 trillion just to fill the infrastructure gap. The challenge, therefore, is to bring about a substantial increase in infrastructure investment. Private funds can play a key role in this effort.
The Indian government has announced ambitious plans to boost infrastructure investment. The National Infrastructure Pipeline and National Monetization Pipeline present over $80 billion in opportunities for the private sector. A key principle of these plans is the privatization of operating assets within a concession framework – that is, time-limited ownership. This will help the government release value to reinvest in new infrastructure or reduce the budget deficit. The infrastructure privatization effort will require significant investments from private funds, as well as strategic investors. With a long history of investing in Indian infrastructure, private funds have invested over $150 billion since 2016 alone.
Privatization can generate a host of benefits for consumers, markets and the economy. As with the private roads project, they can lead to substantial job creation, as opposed to job losses. Moreover, through the break-up of large – and, in some cases, unwieldy – organizations, privatizations can encourage a more entrepreneurial spirit in the smaller companies created as a result.
Finally, when financed by private investors experienced in these activities and assets, these projects can also benefit from global efficiencies and best practices. This can lead to faster technology adoption and better health and safety procedures, among other improvements.
An excellent example of such a program is the privatization of roads in India, which has consistently attracted private capital over the past 20 years. Under the Toll-Operate-Transfer (TOT) initiative, the GoI has raised over ₹300 billion in the past five years. The privatization effort has yielded benefits beyond just raised capital and has created thousands of jobs by establishing new headquarters for each of the platforms that would otherwise have been run solely under the umbrella of the National Highway Authority of India (NHAI). It also resulted in the implementation of the FastTag online toll system, app-based notification of dangerous road conditions, and thousands of hours of training aimed at reducing traffic accidents.
Privatization, of course, has its detractors, the proverbial “selling the family silverware” being the most common. The fact is that privatizations can lead to the creation of a lot more “money”. In India’s case, the public sector has more to gain by owning a stake in something with immense potential for growth in value driven by privatization.
Critics have also argued that selling assets at a higher cost of capital is more expensive than taking on debt. If it were that simple, however, infrastructure around the world would be financed by government-guaranteed debt, which would defeat its main purpose: to avoid using the sovereign balance sheet and increasing sovereign risk. . Even if this debt was incurred by public sector enterprises (PSUs), the Indian government, as the major shareholder, would still bear the risk. Moreover, this debt, in most cases, would still be considered a liability of the government, which would have a negative impact on the credit rating.
With privatizations, the GoI’s objective is to raise capital to reduce public debt or reduce the budget deficit. Regulatory restrictions make it difficult to transfer debt proceeds from the PSU to the government as a shareholder. In contrast, the Indian government and other shareholders can realize the proceeds from the sale of an asset in the form of special dividends and through other mechanisms.
Successful privatization requires effective planning and implementation. Fortunately, India has already established models that have worked, such as the aforementioned road privatization program. Indian strategic investors can participate at all levels, including NHAI’s greenfield build-operate-transfer (BOT) projects. And sovereign wealth funds and pension funds can participate as minority investors in government-sponsored infrastructure investment trusts (InvIT). Another example is the airport regulation model, which provides fixed returns on a regulatory asset basis.
Similar to how developers guide strategic decisions for companies, the GoI is taking the lead in divestments, and its steadily accelerating efforts should be visible soon. In this context, India’s current low level of private investment in infrastructure compared to other countries is not due to lack of interest or lack of precedent. Demand, to a large extent, is limited by available supply. Once this constraint is lifted, investors in private infrastructure funds should be more than eager to heed the Indian government’s call to unlock a developed India by 2047.
