In a bid to overcome chronic infrastructure deficiencies that constrain India’s growth, Montek Singh Ahluwalia, deputy chief of India’s Planning Commission, yesterday announced the introduction of new government subsidies to lure more projects.
India needs to step up the rate of infrastructure investment by about 2.5 to 3% of GDP every year if the country is to have any chance of growing at 8 to 9% annually, Ahluwalia said yesterday.
Public private partnerships offer an ideal vehicle for the government to boost such investment above the current rate of 4.5% of GDP, he said, adding that India is ready to stump up public funding in certain infrastructure programmes to make them more attractive to private investment.
To help such projects get off the ground, the finance ministry will provide viability gap funding grants up to 20% of the capital cost, Ahluwalia noted. Guarantees on infrastructure loans of Rs100 billion a year could also be provided by the government on a portion of the long term debt in certain projects, he said.
The Infrastructure Finance Company set up recently by the government will provide an “explicit public sector subsidy” on certain infrastructure projects where the tariff structure did not make them attractive enough for private investment unless such a subsidy was available.
In the roads sector, a clear policy to provide a capital subsidy is already in place. Where expected returns do not cover the full cost of the project, up to 40% can be offered by way of a capital subsidy, Ahluwalia said. Investors are invited to bid competitively for the projects along with the capital subsidy that it will require. In the last year 30 projects were bid out in that manner, and the actual 7% subsidy they involved was lower than the government expected.
The government has approved a policy framework that will allow 20,000 kms to be constructed on a build-operate-transfer basis. But some critics say that the government’s preference for build-operate-transfer (BOT) contracts in road projects has resulted in poor quality roads being built. “Real private sector participation involves BOT contracts where the private partner takes on the market risk,” Ahluwalia said. While he has nothing against annuity contracts, which bundle maintenance and construction work to the contractor, the official pointed out they generally involved a higher cost of capital. In cases where the government cannot get a BOT contract signed, perhaps such bundling is possible, he added.