From UPSC perspective, the following things are important :
Prelims level : Not much
Mains level : Paper 3- Declining private investment in the infrastructure and ways to boost it
Declining private investment in the infrastructure needs policy overhaul. The article suggests the changes in the policy and approach on the part of the government to achieve the sustainable 40 per cent private investment in the infrastructure.
Declining private investment in infrastructure
Currently, private financing into the infrastructure sector has declined to around 20 per cent of the total funding.
Reasons for the decline are-
- 1) the crisis in the non-banking finance sector.
- 2) the financial challenges faced by infrastructure companies.
- 3) the inadequately developed Indian market for infrastructure financing.
- The Economic Survey 2017-18 has assessed India’s infrastructure financing needs at $4.5 trillion by 2040.
- Reviving private investment flows into infrastructure to around 40 per cent will be key to attaining this threshold.
Actions need to be taken to revive the private investment in infrastructure
- The Vijay Kelkar committee had put out a balanced report in 2015 on overhauling the PPP ecosystem, including governance reform, institutional redesign, and capacity-building.
Ramping up private investments in infrastructure will need action on two fronts:
- 1) Refreshing institutions and policies for channelling financing.
- 2) Providing a stable, durable, and empowering ecosystem for private players to partner with government entities.
1) Institutions and policies for channelling financing
- Due to long-duration profitability cycles of infrastructure projects, successful PPP requires stable revenue flow assurances and a settled ecosystem to investors over long periods.
- This could be achieved means of policy stability, assurances possibly secured by law.
- PPP contracts also need to provide for mid-course corrections to factor in uncertainties including utilisation patterns, as well as the creation of competing infra assets.
- Government partners in PPP arrangements need to ensure that open-ended arrangement that might entail unforeseeable risk are minimised for the private investor, including aspects such as land availability and community acceptance.
2) Institution and policies for financing
- There is a need to change the culture and attitude towards the conjoining of government entities and private partners.
- Kelkar committee has stated that there needs to be an approach of “give and take” and the Government should avoid a purely transactional approach.
- Government should avoid trying to minimise risk to themselves by passing on uncertain elements in a project — like the land acquisition risk — to the private partner.
- This attitudinal change can be achieved by amending the Prevention of Corruption Act to encompass modern-day requirements, including factoring in the need for government agents to take calibrated risks while engaging with the private sector.
- The private partners also need to be incentivised to focus on project outcomes, with guard-rails in place to discourage rent-seeking behaviour.
- In sum, risk avoidance by the public entity and rent-seeking by the private partner are the twin challenges that need to be carefully addressed.
- On the regulatory front, a compelling need would be to promulgate a PPP legislation which can provide a robust legal ecosystem and procedural comfort.
Consider the question “Declining private investment in the infrastructure has several implications for the economy. In ligh of this, examine the factor for such decline and suggest the measures to boost the private investment in the infrastructure.”
After we emerge out of this pandemic, a focus area for public policy has to be the creation of a modern-day, sustainable and resilient infrastructure. . Designing a fresh approach and creating a stable policy environment that provides comfort and incentives to private investors will be key to attaining this goal.