While the Indian Government expects half of its ambitious $1 trillion infrastructure investment target from 2012 to 2017 to be met by the private sector, the latest numbers from its central bank indicate investor interest in Indian public-private partnerships (PPPs) is falling.
The Reserve Bank of India (RBI) Annual Report 2011-2012 shows that new investments have slowed down to INR1 trillion (€ 14.4 billion; $18.1 billion) from INR2.2 trillion in the previous year, with power and telecommunications accounting for most of this drastic fall. Investment in roads, ports and airports has also fallen sharply.
The viability of ongoing projects is threatened by long gestation periods and input supply shortages, the report said. The RBI believes “preserving India’s growth story through revival of infrastructure investments” to be one of the medium term challenges for the Indian economy.
Investment in the power sector has been affected by inadequate planning and coordination between power and coal sectors, and also the slow execution of coal projects, the report found. Rising losses for public sector utilities have also discouraged investment in the sector.
Some INR3.3 trillion of bank finance is locked in the power sector, raising risks that these loans may need to be restructured and may even become non-performing, the RBI added.
Moving on to roads, a record 6,491 kilometres of road development work was awarded in 2011-2012, estimated to be worth INR362 billion. However, the RBI sees a risk of falling interest in the sector as road tendering activity has decreased significantly during the first quarter of 2012-2013.
“Road projects have slowed down due to issues in land acquisition and problems with legal, procedural and environmental clearances. More lately, availability of finance has emerged as an added constraint.”
Financial conditions have tightened as road construction firms are already leveraged and are unable to raise more debt in the absence of fresh equity.
As such, the National Highways Authority of India is planning to award tenders for 3,000 kilometres of road construction using Engineering, Procurement, Construction (EPC) contracts. In these, the builder is paid for the cost of material and construction.
When it comes to finance, gross bank credit to infrastructure was INR6.2 trillion as of April 2012, the report stated. However, the flow of bank credit to infrastructure has decreased from 38 per cent in 2010-2011 to 14 per cent in 2011-2012.
There is “limited fiscal space available in the public sector,” according to the RBI, and a lack of private sector participation in certain key sectors such as railways, irrigation, water supply and sanitation, ports and power distribution.
“In order to make space for private credit to help the investment cycle pick up a much stronger switch to capital expenditures is necessary without further increasing the deficits.”
The RBI also sees an urgent need to step-up non-debt creating inflows, especially in the form of Foreign Direct Investment (FDI) in sectors such as insurance, retail, aviation and urban infrastructure.