India's position as a global economic superpower has been
cemented over the last few years. With a comfortable gross
domestic product (GDP) growth of around 9.2%, it is today the
fourth largest economy in the world.
The infrastructure sector has, however, not kept pace with
the rapid economic growth witnessed in the country.
Infrastructure maintenance and development has long been the
exclusive responsibility of the state governments and public
bodies, with their constraints of public funding and operation.
An estimated $150 billion investment is required to match
rising demand over the next few years.
The Committee on Infrastructure headed by the prime minister
of India estimates that, by 2012, investment requirements in
infrastructure sectors will include Rs2.2 trillion ($54
billion) for roads and highways, Rs400 billion for
modernization of the civil aviation sector, Rs500 billion for
ports and Rs3 trillion for railways. This is without
considering the investment required in the traditional
infrastructure sectors such as oil and gas, and power.
To address the widening gap, the Indian government has been
working towards legal and policy level changes in the
infrastructure sector, to facilitate private sector
participation and foreign investment. Innovative financing
structures, with state backing, are also being considered,
including a scheme in which funds can be borrowed directly from
the Reserve Bank of India (RBI), the country's central
Considerable activity has also been seen in the financing of
infrastructure projects as a result of greater private sector
participation. However, these initiatives have had their fair
share of roadblocks in the past and further impetus needs to be
provided for the next stage of infrastructure development.
India continues to experience a severe power shortfall, with
several states, including the industrial pioneer Maharashtra,
whose capital is Mumbai, the commercial nerve centre of India,
facing severe power shortage. In 2004, the Ministry of Power
estimated that capacity addition of 100,000 MW or more will be
required in the 10 years ending in 2012 to meet the projected
electricity demand of the country.
Privatization efforts in this sector began in 1991 and the
sector has since then witnessed groundbreaking legal changes. A
new phase of regulatory and legal changes commenced with the
enactment of the Electricity Regulatory Commissions Act 1998,
which set up an independent regulator, and the Electricity Act
2003 (the 2003 Act), which consolidated and replaced old
statutes and laid down the framework for restructuring the
electricity industry in India. The establishment of the Central
Electricity Regulatory Commission (CERC) and the State
Electricity Regulatory Commissions (SERC) set the stage for
transparent tariff setting. Over the last few years the CERC
and the SERC have been involved in setting tariffs for power
procurement by distribution licensees, setting consumer tariffs
and settling disputes between generators and licensees. A
specialist appellate body, the Appellate Tribunal for
Electricity, has also been constituted to deal with electricity
law disputes, reducing the burden of the ordinary courts of law
considerably and giving the sector a fair and balanced
appellate forum comprised of legal and technical experts.
Competitive bidding has emerged as the preferred route for
awarding generation, transmission and distribution projects to
ensure lower prices, and has been endorsed in the Tariff Policy
The recently concluded award for the two ultra-mega power
projects (UMPPs) (4000 MW or more and requiring investment of
more than $3 billion each) was accomplished through the
competitive bidding process. Five more projects of similar size
are at various stages of bidding. Several benefits are proposed
to be extended to UMPPS, such as tax exemptions and enhanced
foreign currency borrowings. The land and several approvals are
acquired by the government and then handed to the successful
Despite this consolidation, the power sector is still dogged
by regulatory uncertainty. More work is needed in this area.
The establishment of the Appellate Tribunal for Electricity is
a welcome step and is expected to provide greater stability and
independence to the regulatory regime, a much-needed departure
from the inconsistent approach of several state regulators.
Over time, the long-lasting debate on the jurisdiction of the
regulatory commissions to arbitrate and regulate contracts is
expected to be resolved by the Indian judiciary.
Though a start has been made on trading in electricity as a
distinct form of activity, in a country that is facing acute
power shortage, the regulators and courts are increasingly
faced with claims of profiteering by traders. The extent of
trading margin and whether power utilities can trade are being
considered by courts. In the last year, 22 licences have been
awarded for inter-state trading.
Interest has grown in spot trading and merchanting in
electricity, with open access to the transmission and
distribution system being implemented. A few projects with a
share of merchant sales are expected to achieve financial close
shortly. A power exchange, a common platform for electricity
trading, is being contemplated and the CERC has initiated a
policy discussion on this topic.
One of the issues that will accelerate the growth of the
sector is reduction of the cross-subsidy surcharge. The
cross-subsidy surcharge, payable when a consumer purchases
electricity from a person other than the distribution licensee
in that area, is so high in most states that it does not make
economic sense for a customer to purchase power directly from a
private generator or a trader. The Tariff Policy requires that
the cross-subsidy surcharge be brought down to a maximum of 20%
of its opening level by 2011. Reduction in cross-subsidy
surcharge will increase competition and provide freedom of
choice to customers.
Oil and gas
The oil and gas sector has seen considerable activity over
the past few years. In the upstream sector in 2006, pursuant to
the National Exploration Licensing Policy, six rounds of
successful bidding of oil exploration blocks were completed and
the next round is being planned. Cross-country pipelines have
been implemented to transport gas from the south-east coast to
the industrial markets of the west. The government recently
accorded cross-country pipelines infrastructure status under
the income tax laws. In the downstream sector, new legislation
has created the Petroleum and Natural Gas Regulatory Board, the
regulator for all downstream activity, including refining,
processing, storage, transportation, distribution, marketing
and sale of petroleum and petroleum products. The Board was
constituted recently and is expected to be fully functional
Limited recourse project financing of gas exploration is yet
to be seen in India. The rights of the developer to freely
dispose gas (without tender) and pricing are the subjects of a
policy and legal debate. The Production Sharing Contract for
grant of exploration rights, entered into under the Oilfields
(Regulation and Development) Act 1948, permits security over
participating interest for the purpose of raising financing but
the security is subservient to the interests of the government,
and financiers cannot carry out operations without government
approval. An assignment of the rights of exploration granted
under the Agreement is also not permitted without the
In respect of pipeline financing, the chief asset of the
developer, the right of use granted under the Petroleum
Pipeline (Acquisition of Right of Use in Land) Act 1962, cannot
be assigned or charged to the lenders. The only recourse
available for the lenders is to act as the nominee of the
rightholder to exercise all the rights that the rightholder
There have also been large refining capacity additions,
financed by Indian and international lenders, in the last
Indian port traffic has increased from 165 MTPA (million
tonnes per annum) in 1991 to over 500 MTPA in 2004-2005. There
has also been a 10.4% growth in containerized cargo and a 6%
growth in bulk cargo. Under the National Maritime Development
Programme, projects worth $13.33 billion are proposed to be
undertaken in India over the next few years.
Port sector reforms were initiated through amendments to
both the Indian Ports Act 1908 and the Major Port Trusts Act
1963, and formation of the TAMP, an independent regulatory body
to fix tariffs at the main ports. Modifications were made to
permit joint ventures and foreign collaborations in the port
sector and to enable port authorities to enter into private and
joint ventures, creating additional port capacity.
Private participation in the port sector has increased, with
several global players investing in the sector.
To facilitate public-private partnerships in the sector, the
government of India has drafted and finalized a model
concession agreement and standard bid documents for the sector.
A draft Maritime Policy is also expected to provide an
integrated vision for the development of the port sector.
The sector is, however, dogged by problems such as land
acquisition, environmental clearances, lack of road and rail
connectivity to sites, and competition between large and small
ports, resulting in diminished enthusiasm.
The unprecedented growth in the aviation sector has shown
the gross inadequacy of the existing airport infrastructure.
Private players are permitted to take part in constructing,
modernizing and developing airport infrastructure in the
country under an amendment in the Airports Authority of India
Act 1994. Services such as air traffic services, safety and
security have been retained by the Airports Authority of India
Recently, the Mumbai and Delhi Airports were handed over to
the private parties under a competitive bidding process.
Development of greenfield projects in Bangalore and Hyderabad
has also been awarded to the private players.
As with the oil and gas sector, owing the strategic
importance of airports, the government has restricted the
rights of the developer to create security over the assets in
an airport. The only right available to the lender is the right
to substitute the developer subject to the approval of AAI.
The creation of an independent regulator is on the horizon
and bidding for privatization/modernization of airports in
Chennai and Kolkata and about 35 airports in non-metro cities
is expected later this year. Steps for augmenting
non-aeronautical revenues at many airports are being explored
by offering landside commercial development, with the
expectation that this will subsidize the aeronautical
Since 1997, the government of India has sought to encourage
private sector participation in the development of roads. This
included a policy decision that all future phases of National
Highways Development Programme (NHDP) would be carried out
mainly on a public-private basis. (The NHDP involves projects
such as the Golden Quadrilateral, the North-South and East-West
Corridor and port connectivity.) The National Highways Act 1956
was amended to permit private entrepreneurs to undertake
development of national highways on a build-operate-transfer
basis and to recover their investments through tolls.
It is anticipated that the sector would require an
investment of $50 billion over the next decade, of which only
10% will be public funding. So substantial private
participation is needed, backed by lending, essentially by
One of the main issues encountered in road financing regards
the creation of security in favour of lenders. Under the
standard concession agreement, the concessionaire is not
permitted to create any encumbrance over the project road,
which cumulatively encompasses all the assets relating to the
project, including the rights of the concessionaire over the
project site, tangible assets such as civil works, the project
agreements such as the EPC, O&M and tolling contracts, and
financial assets such as security deposits and insurance
proceeds. So the concessionaire's ability to create
satisfactory security in favour of the lenders is restricted
and the only recourse available to the lenders is to substitute
the developer with the approval of NHAI.
Several new projects are planned this year that require
large capital, already attracting the attention of
international banks and investors.
With an increasing amount of population moving to the cities
(so much so that India has 10 of the 30 fastest-growing urban
centres in the world), there is a great pressure on existing
Problems with respect to effective development of urban
infrastructure include the lack of revenues, high taxes and
unsatisfactory performance by municipal corporations. There has
also been a substantial reduction in the budgetary allocation
for infrastructure over the years. State governments have not
been in a position to fund urban infrastructure, due to their
poor fiscal position.
Private sector involvement is expected to increase in urban
infrastructure, with several projects in Mumbai proposed with
private participation. The first phase of the Mumbai Metro has
already been awarded to a leading private player. The bidding
for the second phase of the Mumbai Metro, the trans-harbour sea
link, is underway. Similar projects are also being contemplated
in the cities of Bangalore and Hyderabad. International
financiers have shown interest in financing municipal
Special Economic Zones
The enactment of the Special Economic Zones Act 2005 (the
SEZ Act) consolidated the myriad state-level policies into a
single legislation and gave an impetus to the uniform
development of Special Economic Zones (SEZs) in India.
The SEZ Act provides for a single window clearance for all
state and central government consents for the project. The
units in an SEZ enjoy several fiscal benefits, including
exemption from customs duty, central excise and income tax.
Almost 400 SEZs are believed to be in the pipeline.
Land acquisition has emerged as a big problem for SEZs.
After violent protests over acquisition of agricultural land
and related displacement, the compulsory acquisition of land
has been abandoned. There have been restrictions on the size of
SEZs. More proposals are now being cleared with these changes
International non-recourse debt financing in projects is yet
to be seen, despite the resolution of all investment claims in
the Dabhol power project. However, an increasing role is
foreseen for export credit agencies and multilaterals in some
of the large projects that are coming up for financing in the
power sector. A case in point is the bidding for the two
ultra-mega power projects in Mundra and Sasan. Although
initially several multinational developers had expressed an
intention to bid for the project, most of them withdrew because
they did not consider the risk profile acceptable. However, the
debt financing is expected to see a combination of Indian and
Private equity investors will be a main source of funding
for Indian infrastructure. Though greenfield projects are
usually developed by Indian developers, private equity might
provide an opportunity to take out Indian developers' capital,
allowing them to use the capital to develop other projects.
So far, the financing of Indian infrastructure has not been
affected by a lack of foreign capital. Leading Indian
conglomerates have made large strides in the infrastructure
sector. However, to meet the ever-growing capital requirements
for infrastructure, international financing would be a welcome
addition to India's growing market.