The infrastructure sector in India has seen impressive transformation in the last ten years and is witnessing impressive growth across various segments – more significant in some (such as telecom, roads and highways) than in others (such as ports, airports, railways etc.). The most important development in the sector has been in terms of attracting private investment in areas like telecom, ports and roads, including through the public private partnership (PPP) route. A recent study estimates that over US$ 190 billion of investments are committed over the next five years in India’s infrastructure sector, which is estimated to grow at an average rate of 15% per annum over the next few years. Nevertheless it is also acknowledged at the highest levels in the government, that infrastructure continues to be one of the main impediments to economic growth and will therefore continue to be a priority area for reforms. |
| The Committee on Infrastructure, headed by the Prime Minister, has estimated the following investment requirements for the sector: |
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National Highways: Rs. 1720 billion (Euro 30 billion) by 2012 |
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Airports: Rs. 400 billion (Euro 7 billion) by 2010 |
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Ports: Rs. 500 billion (Euro 8.8 billion) |
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| A substantial share of the above estimated fresh investment is expected to come from private sector, including foreign direct investment (FDI). It has been estimated that Indian infrastructure sector has the potential to absorb up to US$ 150 billion in FDI in the next five years. |
Key drivers of growth
The Government of India (GOI) has initiated an ambitious reform programme, involving a shift from a controlled to an open market economy. Building further on the initiatives taken by the previous Government, the present Government is undertaking several measures to enhance the quantum of investments in the infrastructure segment.
Multilateral agencies such as the World Bank and the Asian Development Bank (ADB) are funding various infrastructure projects on a large scale in India. Other agencies include the Japan International Bank for Cooperation (JIBC) that funded the Delhi Metro (Underground Railway) Project. Various State Governments are mobilising funds from these agencies to support rural roads and sanitation projects.
The Government has announced several tax breaks to encourage/attract private sector investments in the sector. It is also devising return schemes that are attractive for the private participants, such as annuity payments and capital grants for road projects. Laws are being enacted to improve the finances of utilities and make their management more transparent, so as to improve returns on these facilities.
The Government is also tapping alternative sources of funds for infrastructure development. One of these is the cess on petrol and diesel, which is being used to fund road projects such as the Golden Quadrilateral and the North-South East-West corridor (more details appear below). It is also contemplating levying a tonnage tax on ships (to fund development of ports), and special taxes on air travel (for airports).
The Government of India has offered several projects in the infrastructure sector on a Build-Operate-Transfer (BOT) basis. BOT contracts enable construction companies to complete their projects in a timely and cost-effective manner, thereby reducing time and cost overruns arising from government delays. These projects also offer attractive returns, with estimated net equity IRRs (Internal Rate of Return) of 18-25% over the concession period. |
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ICREON