Perspectives on Infrastructure Development

CK KOSHY IAS (Rtd.)

What is Infrastructure ?

Evolution of Human Organisations
• • • • • • Nomadic Groups Tribes Villages Agriculture based villages City states Nations

Political & Economic Units • The Political system- Legislature, Judiciary, Executive. • The Economy- System of production and distribution of goods and services.

Classification of Economies
• Under -developed • Developing • Developed • Less Economically Developed (LEDC) • More Economically Developed (MEDC) • Newly Industrialized Country (NIC)

Indices to Measure Development
• • • • • GDP - Gross Domestic Product Per Capita Income Life Expectancy Human Development Human Happiness Index

What are the external signs of a developed economy ?
• Big airports, large number of flights. • Well maintained airport terminal, excellent airconditioning • Large number of high quality cars, models of cars. • Good roads, excellent traffic management

What are the external signs of a developed economy ?
• Good Hotels • No shortages, good food hygienic water supply • Shops over flowing with consumer durables

What are the external signs of a developed economy ?
• Good law and order situation • Neat and clean streets, parks, open public places • No obvious signs of malnutrition, slums, poverty

Quick-fix solutions to eliminate poverty/develop economy
• Get foreign –aid to fund specific projects, import cars, consumer durables etc. • Direct public funding of projects even by resorting to deficit financing • Import goods and services and subsidise them to the public • Money-order economy-fund projects through remittances.

Problem of Sustaining Growth
• Foreign aid comes with strings attached. Could be withdrawn at short notice • Deficit financing will lead to inflation running out of control. • No Government can subsidise goods and services endlessly without getting into a debt trap • An economy based on remittances can not be self- sufficient and strong.

Probing the outward signs of a developed economy
• Good airports, good roads, cars/buses means a good TRANSPORT sector. • Well lit streets, air-conditioned malls, terminals and trouble free electric supply spells an efficient POWER sector. • A good telephone network with easy accessibility, good fax and mobile services implies a good TELECOM sector.

All Paths lead to one goal
For sustained economic growth Development of Infrastructure is an absolute necessity.

Two Types of Infrastructure
• Economic Infrastructure: Transport, Telecommunication, Energy • Social Infrastructure: Health, Education, Rural Water Supply

Case Study: Hotel Project in Afghanistan
• • • • Building, Hardware, Equipment HRD, Manpower, Trained Staff F&B, Milk, Meat, Vegetables Connectivity, Roads, Airports, Telecommunications.

Basic Infrastructure Indicators
Region
Africa East Asia Eastern Latin & Pacific Europe & America & Central Asia the Caribbean Middle East 7 North Africa South Asia

POPULATION Major Access indicators Electricity Water
Sanitation

674

1823

474

518

300

1378

24 58 36 34 62

88 78 49 95 537

99 91 82 77 438

89 89 74 54 416

92 88 75 51 231

43 84 35 65 61

Roads Tele-density

Explanation:
• Electricity: % of population with access to network. • Water: % of population with access to improved sources. • Sanitation: % of population with access to improved sanitation. • Roads: % of rural population living within 2 kms. of all season road. • Tele-density: Fixed line and mobile subscibers per 1000 population.
Source: Infrastructure and the World Bank, Dec 12th 2005.

Definitions of Infrastructure:
“The

basic structural foundation of a society or enterprise.”
-The Oxford English Dictionary

Definitions of Infrastructure:
“The physical framework of facilities through which goods and services are provided to the public.” India Infrastructure Report

Definitions of Infrastructure: (Contd)
Road, highway, bridge, airport, rails system, water supply project, irrigation project, sanitation project, sewerage system, generation or distribution of electricity, any power project, telecommunication services, inland container depots, for the purpose of 10(23G) of the Income Tax 1961 as per the Finance Act 1997

Definitions of Infrastructure: (Contd)
• Infrastructure is an umbrella term for many activities referred to as “social overhead capital” by such development economists as Paul Rosenstein- Rodan, Ragnar Nurske and Albert Hirshman. They include Public Utilities, Public Works and other transport sectors. - World Bank

The Core Economic Infrastructure Sectors
• POWER • TELECOM TRANSPORTATION
Roads, Railways, Airports & Ports

Special Characteristics of Infrastructure Projects • • • • • High Capital Costs Long Gestation Period High Cost of Entry Reduced Competition Non-Tradable Services

Special Characteristics of Infrastructure Projects (Contd.) • Vulnerable to Regulation Policy • Creates near Monopoly Conditions • Pricing of services usually subject to State approvals

Demand-Supply Gap in Infrastructure in India
Date Total Investment requirements in Infrastructure 1996 to 2000-01 Rs.4,000 bn.- Rs. 4500 bn. 2000-01 to 05-06 Rs. 7500 bn.

Source: Infrastructure Development and Planning, by G.Raghuram & others

Sector-wise Financial requirements for the period 1996-97 to 2005-06.
Sector Investment (Billions of Rs.)

Power Telecom Roads Ports Urban Infrastructure Railways

Rs. 5000 Rs. 1000 Rs. 1150 Rs. 255 Rs. 2800 Rs. 2000

Source: Infrastructure Development and Planning, by G.Raghuram & others

Issues in Infrastructure Development • • • • Public Private Partnership Allocation of Risk Raising of Funds Types of Contracts

Public-Private Partnership (PPP)

Public-Private Partnership • Traditional role of Government. • Perestroika, Glasnost, Liberalisation. • Lack of resources and scale of investments needed in infrastructure.

Rationale for Public Private Partnership
• • • • • Lack of resources with Govt. Time constraints in implementation Access to latest technology Quality of services Value for Money

Public Private Partnership
Public-private partnership (PPP): Is a system in which a government service or private business venture is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP or P3.

Public Private Partnership (Contd.)
Typically, a private sector consortium forms a special company called a “special purpose vehicle” (SPV) to build and maintain the asset. The consortium is usually made up of a building contractor, a maintenance company and a bank lender. It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it.

Risk Allocation

Identifying Business Risk (contd.)
• Even though an infrastructure facility may be considered critical on the basis of social and economic requirements of an area – its usage may be far lower than required to justify a prudent investment decision. It is therefore essential to determine accurately the expected cash flows – and therefore the viability of the project on purely commercial terms. This is an essential first step to ascertain the extent to which the project can support commercial financing – and the need for budgetary support if any.

Identifying Business Risk (contd.)
• • Infrastructure projects are exposed to a wide variety of risks at various stages of project evolution. The main risks include pre-construction, construction, demand and revenue, currency, force majeure, political and financial risks. a) The risks have to be adequately addressed, both at the project development and implementation stages. b) In a manner satisfactory to the debt and the equity investor before they commit to project funding.

Typical Infrastructure Project Risks
1.Economic Risks: Inflation, Economic Policy stability 2.Socio -political risks: Social stability, regional stability, corruption, social non-acceptance 3.Regulatory & Legal Risks: Stability of regulatory framework, enforceability of contracts, independent regulations 4.Market Risks: Tariffs, demand, competition

Typical Infrastructure Project Risks. (Contd.)
5.Development & Construction Risks: Design and Planning, construction & completion 6.Start-up & Operating Risks: Performance, environmental concerns, suppliers performance 7.Technology Risks: Obsolescence 8.Force Majeure: Natural disasters, War.

Ideal Risks Bearer
Economic Risks: Shareholders, lenders and Socio-Political Risks: Government Government

Regulatory Risks: Regulator, Government and Legal advisors Market Risks: Operator, Shareholders and Regulators Development Risks: Contractors, shareholders, Insurers Start-up & Operating Risks : Operator, Shareholders, IInsurers Force Majeure : Insurers, Shareholders and Govt.

Financing Infrastructure Projects

Traditional Financing • Government: through budgetary allocation, through Tax revenues, deficit financing • International Funding: World Bank, other international agencies like ADB, OECD etc.

Financing Infrastructure Projects
Special characteristics of Infrastructure Projects

• Large capital costs. Long Gestation period • High cost of entry and exit • Non tradable services: No exports/imports. Revenues only in local currency • Vulnerable to political/policy changes. Eg Power tariffs • Projects are not homogenous

Governmental Assistance to Infrastructure Projects
• Participation in Equity (not exceeding 49%) • Assistance/Subsidy not exceeding 20% of project cost • Loans • Guarantees • Escrow account • Right to develop land ( “sweetners”) • Tax incentives

Means of Financing Infrastructure Projects:
• Debt-Equity mix with low debt equity ratio to mitigate debt servicing requirements • Bonds: Taxable or non taxable • Deep Discount Bonds: With exit clause • Credit Enhancement: Credit Rating, Govt. Guarantees • Securitisation

Types of Contracts
• Concession Agreement • BOT : Build-Operate-Transfer • BOLT: Build-Operate-LeaseTransfer • BOO: Build-Own- Operate • BOOT: Build- Own-OperateTransfer

BOT: Build- Operate-Transfer Private operator constructs a plant, operates it for a number of years, relinquishes it to Govt. which agrees to pay a sum calculated over the life of the contract to cover costs and ensure reasonable return. Govt. obliged to pay for a minimum specified quantity of services.

BOLT: Build Operate Lease and Transfer
A financing scheme in which the assets are created by the private sector partner and leased out to the public sector for operation. Lease payments by the Public Sector utility is structured to amortise the debt and provide an adequate return. At the end of the lease period the assets are transferred to the Govt./PSU ( Used by Railways)

BOO: Build Own and Operate Ownership of the assets is private, operation during the concession period is in private hands. At the end of the period transfer of assets do not take place.

• A form of project financing, wherein a private entity receives a franchise from the public sector to finance, design, construct, and operate a facility for a specified period, after which ownership is transferred back to the public sector. • During the time that the project proponent operates the facility, it is allowed to charge facility users appropriate tolls, fees, rentals, and charges stated in their contract to enable the project proponent to recover its investment, and operating and maintenance expenses in the project.

BOOT: Build Own Operate and Transfer

Thank you

Sign up to vote on this title
UsefulNot useful