Shaking the foundations

According to Government of India data, the country’s infrastructure sector is expected to expand by almost 20 percent a year over the next five years, and attract more than $1.1 trillion in investment. For years, the government was the largest developer of infrastructure in India, but in 2006, as the country’s economy grew rapidly, companies bid aggressively for contracts to build roads, railways and ports through public-private partnerships (PPPs). 

However, the long-term nature of infrastructure projects in Asia’s third-largest economy means unexpected complications can (and almost certainly will) occur. Alongside expansion, the debts of Indian infrastructure companies have grown to their highest in more than a decade. Moreover, the infrastructure sector remains plagued by a lack of transparency, delays in acquiring relevant licences and permits, and other, serious operational difficulties related to land acquisition. 

Such difficulties are inclined to invoke jugaad: a “creative” innovation for a quick solution that, for all its positive repercussions, has significant negative implications, as it justifies circumventing rules for a quick and profitable outcome – and ultimately fuels and supports opaque business practices.

GOVERNMENT ATTENTION

The World Economic Forum’s Competitiveness Index for 2014 – 15 lists inadequate infrastructure as one of the most significant problems inherent in doing business in India. The Indian government, led by Prime Minister Narendra Modi, who was elected on the promise of liberalising reform, has acknowledged this and has prioritised the issue. In September 2014, Modi launched the ‘Make in India’ campaign, a high-profile, national programme designed to improve the “ease of doing business” and help transform India into a global manufacturing hub. 

Furthermore, in his 28 February 2015 budget speech, Minister of Finance Arun Jaitley stated that the second-biggest challenge for the government, after tackling agricultural income, is boosting investment in infrastructure. The budget reflects this: despite fiscal constraints, the government increased public investment in roads, railways, ports and other projects by $11 billion, hoping to revive private investment in a sector where the PPP model has been largely unsuccessful. 

In the power sector, the challenges of fuel supply, bottlenecks and grid congestion abound. But significant improvements have already been made. The Modi administration has pledged to provide all of India with 24/7 electricity by 2019, and in the transport sector there has been a renewed push to expand the national highway network by 7,150 kilometres (km) in the next three years. Both targets are extremely ambitious, but while all industry sectors will still grapple with infrastructure shortcomings, the improvements will gradually reduce supply-chain delays and costs.

Several high-profile, bilateral initiatives have been launched over the years to boost investment in the infrastructure sector. Most recently, Modi inked an agreement during his visit to the United Arab Emirates (UAE) in August to establish the UAE-India Infrastructure Investment Fund. Its aim is to increase bilateral trade by 60 percent and raise $75 billion to support investment in India’s plans for the rapid expansion of “next generation” infrastructure. 

Following Modi’s visit, the UAE also expressed interest in funding other core infrastructure initiatives, including the ‘Make in India’, ‘Smart Cities’ and ‘Digital India’ campaigns. It remains to be seen whether the grand rhetoric and hyperbole expressed during these discussions will actually lead to any real growth in investment in India from the region. 

The Smart Cities campaign was initially proposed in 2007, as a building block of the Delhi-Mumbai Industrial Corridor (DMIC), one of the most ambitious infrastructure projects in India’s history. Undertaken in collaboration with the Japanese government, the DMIC has spread out across more than 1,500km and six Indian states. It will feature an industrial zone, spanning the length of the corridor, with “smart cities” intended to accelerate the expansion of industry and infrastructure throughout the region.

The Modi administration also loosened fiscal deficit targets in this year’s budget to double spending on roads and bridges. Weak capital investment has traditionally been a key factor behind India’s struggle to realise its growth potential. The Prime Minister’s bet on higher public spending seems to be paying off: annual growth in capital goods production – a bellwether for capital investments – hit a 14-month high of 22 percent in August, according to Government of India data. Statistically, India’s economic growth matched that of China in the first six months of 2015.

RISKY BUSINESS

Even if funding improves, the Indian operating and regulatory environment presents challenges that must be tackled to achieve the government’s ambitious targets. With factories running at nearly 30 percent below capacity, few private companies are in a rush to make fresh investments. Another major reason investors appear to be sitting on the fence is the perceived risk-reward relationship, which they judge to be unfavourable. While opportunities are on the rise, the same old risks prevail in India’s industry, which relies heavily on third parties for materials, equipment and labour. 

The nexus between business and politics in India generates the lion’s share of these risks, and they are complex and pervasive. The opacity of relationships and masked ownership of companies presents clear concerns about the transparency and validity of public procurement and tendering processes. 

Moreover, among other day-to-day operational risks, there is pressure from project and government officials to pay “speed money” for licences and clearances to be expedited and for pockets to be lined. Infrastructure projects are often exposed to a greater risk of corruption, particularly in the construction and power-generation sectors, where the need for land and environmental clearances brings a heightened risk of demands for bribes and kickbacks from stakeholders on all sides. 

Similarly, the tendering of unviable PPP projects is common. Alongside the very real risk of procurement fraud, road projects are rife with contractual and payment risks. For example, the National Highways Authority of India commonly overestimates scopes and underestimates project costs by up to 30 percent, only making modifications when the project attracts no bidders, wasting months of precious time and challenging investor confidence.

PORTS PAVING THE WAY

Ports might offer up something of a success story in the next five years. Nitin Gadkari, India’s road transport, highways and shipping minister, said ports would play a pivotal role in boosting the country’s economic growth, and the success of the Make in India policy, which aims to boost manufacturing’s GDP share from 18 percent to 25 percent by 2022, depends on enabling companies to export from local ports. 

Gadkari acknowledged that India’s logistics cost is three times that of China. Adding to that challenge is a law barring foreign ships from moving cargo among Indian ports, and the fact that congestion, slow turnaround and shallow waters have deterred large vessels from docking locally. As a result, more than half the cargo headed into and out of India is re-routed through Sri Lanka and Singapore instead. 

Prime Minister Modi is moving to scrap the law under the Make in India campaign to gain investment. This will clearly help, and India could potentially recover $260 billion annually in lost shipping trade, but India still has a long way to go before it floats.

MITIGATE THE RISKS

Keeping your head above the regulatory waterline and embracing best practice is the best defence if you want to succeed in the infrastructure sector in India and not risk shaking the foundations of your business. Build your understanding of applicable regulations so that you know them better than the officials themselves: What aspects are clear cut? Where are there ambiguities that could allow officials to cause disruption? 

Design compliance policies and SOPs to be adequate in the context of international anti-bribery and corruption legislation, but tailored to the local operating environment – rather than squeezing the square peg of a foreign programme into the round hole of the Indian operating environment. Identify the key high-risk stakeholders with whom engagement is unavoidable, and devise and communicate effective resistance and engagement strategies to empower your local staff on the ground. 

If you can do all this, then there is every chance you will be able to take advantage of the very real opportunities that India and its infrastructure sector presents.