India’s capital expenditure as a percentage of GDP increased from 1.7% in 2014 to nearly 2.9% in 2022-23. In the 2023-24 budget, the government allocated Rs 10 lakh crore (3.3% of GDP) for infrastructure. The railway ministry received its highest-ever allocation of Rs 2.4 lakh crore and the ministry of road transport and highways (MoRTH) was allocated around Rs 2.7 lakh crore.

Today the construction sector accounts for around 10% of GDP and logistics around 5% of it – totaling 15% which is a sizeable proportion. Every rupee spent on infrastructure development leads to GDP growth of 2-2.5 times per annum in three-four years.
 
To speed up works, the government has set up an institutional framework that includes elements like the PM Gati Shakti National Master Plan (NMP) which provides for seamless execution of inter-ministerial projects on a GIS platform. The National Infrastructure Pipeline is monitoring infra projects with total outlay of Rs 111 lakh crore for the period of 2020-2025. Around 50% share of it is accounted for by roads and railways which are the backbone of the infrastructure sector in our country. The National Logistics Policy can transform logistics sector and reduce logistics costs which are around 14% as compared to 8% in the US and the EU.

Besides, the National Single Window Digital System for ease-of-doing-business is expected to be fully commissioned soon. The Fast Tag initiative has hugely reduced waiting time for vehicles on toll gates.

Yet, some of these so many road and railways projects often face challenges and get stuck too. Finance would be a challenge, as today 80%-85% capital expenditure is coming from the government and hardly 15%-17% is private investments. We need more public-private participation (PPP).

In the latest episode of ‘Checks & Balances’, Geetanjali Minhas discusses trends in infrastructure with sector experts.

You can watch the episode here: https://www.youtube.com/watch?v=6ZhJsrKCF9A

Arindam Guha, economic development and infrastructure expert, said that infrastructure projects – be it road, railways, logistics – all help transport sectors and generate employment. Having good infrastructure is imperative to provide a good life to citizens. Unless there is investment in roads, railways, airports etc, there are no investments in manufacturing also because every manufacturer today is looking at logistics cost as a very, very critical ingredient of his overall cost structure. The only to reduce logistics costs is to upgrade infrastructure. He added that unless you have state of art infrastructure and reduce logistics costs, it adds to the prices of food items.

Speaking on PPP in the most prominent infrastructure sectors of roads, highways and railways, Guha said as compared to roads, where there is a fair bit of private investment like toll-operate-transfer and Infrastructure Investment Trust floated by NHAI, in railways, primarily, the government has been in the driver's seat with limited success for PPP.

Here, PRK Murthy, former chief, Transport & Communications Division, MMRDA, and director (retd) Metro Projects, says there is going to be massive requirement of private participation because $1.5 trillion investment will not be sufficient for infrastructure development.
 
Guha explained that infrastructure projects have long gestation period and typically recovery period is around 20 years. Largely means of financing in our country is through bank finance which is not of that high duration and pension funds, insurance companies hardly have around five percent investment in infrastructure investments. “There is an asset liability mismatch and opportunity for a regulatory change to bring in more long-term investments.” He also said that to attract PPP there are some institutional, legal and transactional issues like freight corridors and land ownership on which the freight corridors have been constructed. The land is owned by the railways whereas the freight corridors have been constructed by dedicated Freight Corridor Corporation of India.

G Raghuram, former director, IIM Bangalore, and advisor, the Infravision Foundation, here added that PPP is required not only for financing but also for managerial attention that private parties can bring to infrastructure development under a public framework and public oversight. He, however, added that under certain conditions the government may still need to continue to be the primary infrastructure developer.

Guha added that for PPP in railways, there is a need for an impartial arm’s-length regulator as it is not feasible for the government to operate trains and also regulate the sector. “The private sector needs to have confidence in a standalone regulator. There is also an additional question of sharing of common infrastructure, where, for example, private passenger trains would have run on the same tracks as the trains operated by the government. In absence of a stand-alone regulator, private investor will have all sorts of apprehensions,” he said.

Roadblocks in project completion  
According to Raghuram, issues of land acquisition and environment clearances need to be addressed proactively at the highest levels. “Government has the right to acquire land for public purpose which includes infrastructure without any delays. Only compensation can be contested. What happens is political forces who speak on behalf of the people who are giving up land manage to go to courts giving a reason. And I think in all fairness of and principles of natural justice courts want to hear them out. So, it is a difficult process.
 
“Though we now have appropriate institutions to address some of these issues but continuous reinforcement is required. Sometimes the larger milieu in the country pulls it down,” he observed.

Guha said that land is a state subject and largely getting addressed in states which are working in close coordination with the government of India. He added that there needs to be a proper transparent land acquisition policy because the land owner has to get his fair share or fair price for that land. Besides, there is also need for an alternate mechanism for providing land in a place where he can relocate itself.

According to Murthy, lack of confidence by both the government and private entities, contractual disputes and minimum traffic guarantees (mostly in revenues and the losses) are the issues hindering PPP.

Murthy said that due to financial condition of contractors, disputes are not being addressed on time or in some cases some companies go under NCLT. “This is an area of huge concern and projects get stalled. Land acquisition and relief and rehabilitation (R&R) of project affected people is another major hurdle in timely completion of projects.”

In a city like Mumbai, the Right of Way and utilities (underground and overground) have to be moved. “Typically, project planning takes four years before it comes on the ground and mostly projects are design–build. My submission would be at least the basic clearances shall be done before the work is awarded to the contractor,” he said.
 
He adds that prime minister narendra Modi is monitoring every project under the Gati Shakti National Master Plan and in terms of the national grid there is good coordination between central government and the state governments and the completion time has drastically reduced.

Guha too adds that 40% of the total supply chain costs are accounted for by the last mile and jurisdiction most often is either with the state government or with the city administration that are not as financially strong and even institutional capacities are limited. He says that government has introduced a special scheme for incentivising state governments for capital investments, but states working in close coordination with the centre are managing to address the last-mile connectivity issues. He added that the Gati Shakti platform can facilitate better coordination than any other institutional coordination.

Guha observed that there is a gap in institutional capacity and extent of maturity across ministries. “It is a question of a strong regulatory mechanism, but more importantly organizational, streamlining and accountability and HR systems support.”

On this, Murthy pointed out that skilled labour and shortage of qualified and skilled engineers both from consultants who are monitoring, contactors as well as government departments is the primary challenge that needs to be addressed. He says right now, people come with bookish knowledge. He called for strengthening institutions like ITIs (industrial training institutes), National Construction Academy, Hyderabad, and polytechnics.

Additionally, he said, the government will also have to increase training and retraining programmes before infusing labour on construction sites. “Safety induction programme has to be monitored, very systematically and very judicially. All these come under institution and capacity building.”

Raghuram too concurred that safety culture in India is less than desirable and needs to be continuous reinforcement, training and better systems. He said that the Odisha trains crash in June is also a part of systems failure and could have been avoided if proper checks and balances were in place. Same happened with Morbi bridge collapse in Gujarat last year.

“Equipment maintenance and the human approach often cause accidents in the railways. They don't always result in fatalities, but many accidents keep happening and largely due to maintenance failures,” he added.    

“It is not a good sign. So, revenue for safety must exist. These are capital intensive projects… you know projects must recover the cost... but at least the operations and maintenance costs must be set off through resources, revenues that they collect,” said Murthy.

Raghuram here added that beyond technology, road design needs a lot of attention to avoid accidents. He said licensing, which is a regulatory function, needs a lot of attention so that people do not buy off licences and there are periodic eye checkups. “Some of the laws can be tightened,” he said.

According to Murthy, in case of large infrastructure projects where Right of Way is available, projects should continue to complete, as typically such projects have a timeline of four-five years for completion within which, depending on any dispute, land acquisition can take two-three years.

Often many infrastructure projects face criticism for not having enough traffic and they are called while elephants. Here both Murthy and Raghuram agreed that such projects are built to be freely available for use for decades to come.

Regulator  
According to Murthy, there is a need for an independent regulator who will look at disputes in a whole in a holistic manner. In addition, a dispute resolution mechanism has to be faster. “The national highways, in the last five years, have put massive claims of around Rs 88,000 crore. This is not a good sign,” he noted.

Guha too said that the adjudication mechanism needs to be faster and there can be a lot of issues where the developer is forced to make compromises because of a force majeure condition. “We need one policy for the sector and that's where the regulator for the sector companies to come in.”

He added that even in the issue of financial sustainability of projects like tariff for tolls the regulator has to play a critical role in tariff adjudication and resolving of disputes between government and the operator. “Because no infrastructure asset can be maintained properly, if the cash flows arising from the asset are inadequate.”

“While we have created regulatory institutions to enable infrastructure development, sometimes relations have been tight. What we need is soft-touch regulation or regulation as the last resort, allowing market forces to first play up,” concluded Raghuram.