Context

The Fourth Industrial Revolution, along with internet penetration and access to smartphones, has changed the outlook of people everywhere.Everyone can see how others live and this has raised their aspirations and expectations. Resultantly, People are demanding improved infrastructure to meet their aspirations.

Scenario in Developing Countries

This aspiration is particularly acute in the developing world, given the poor infrastructure and huge development financing needs. It is estimated that infrastructure investments needed in energy, transport, telecommunications, water and sanitation, education, and health projects will amount to more than 5% of gross domestic product (GDP) in developing countries. Unlike in the UK and the US, in developing economies, nearly 70% of the funding for infrastructure projects comes from the government budget, 20% from private players, and 10% from multilateral development banks. In the developed world, the financing mix of infrastructure projects is very different, with less than 40% being funded by governments and the private sector contributing more than 50% of financing needs.

Developing Countries Advantage

• While the infrastructure financing gap is huge in the developing world, the potential for attracting private investment for infrastructure projects is also huge.
• The basic traits of infrastructure projects, such as market size, long-term steady revenue stream, and investment returns that exceed inflation, make them attractive for institutional investors.

Case of India

• Many developing countries have launched programmes to attract private investments into infrastructure projects.
• India has experienced a rapid increase in the number of public-private partnership (PPP) infrastructure projects during the last two decades.
• The government has established institutional structures in the ministry of finance and line ministries to scale up PPP projects.
• A fast-growing economy and public-sector capabilities to prepare, procure and implement PPP projects have played a key role in creating markets and improving efficiency gains.

Challenges for India:

• India and most of the developing world face a twin challenge—closing the infrastructure financing gap and changing the composition of financing.
• Moreover, there is a heavy reliance of private financing on the public sector and with heavy termination clauses included in PPP contracts, the government is potentially exposed to fiscal risks.

Way Forward

• Looking to the future, there exists a huge potential for creating markets and improving the preparation and regulation of PPP projects in areas such as time taken to prepare projects, contract management, risk management, socio economic impact, affordability, and bankability of projects, and meeting the strategic importance of development goals.
• While commercial banks will continue to be an important source of infrastructure finance, capital markets need to play a bigger role, given the increased demand for long-term sources of finance for infrastructure projects.
• Bond markets, especially local currency bond markets, will be critical to filling the infrastructure-investment gap.
• There is also a need to avoid currency mismatches from borrowing in foreign currency for projects that generate revenues largely in local currency.
• Taxation will play a key role in incentivizing investment and ensuring that the proceeds of investment are redistributed and reallocated in line with sustainable development priorities.
• Finally, there is need to realise that no country can sustain growth and reduce poverty without maximizing development finance. Maximizing finance for development, from billions to trillions, will not come from a single financing instrument. Only by combining resources—international and domestic, public and private, corporate and philanthropic—will it be possible to achieve the necessary levels of financing.