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 • Less Economically
-developed Developed (LEDC)
• Developing • More Economically
• Developed 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 air-
conditioning
• 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withdrawn at short notice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 Middle East 7 South Asia
& Pacific Europe & America & North Africa
Central Asia the
Caribbean

POPULATION 674 1823 474 518 300 1378

Major Access indicators

Electricity 24 88 99 89 92 43

Water 58 78 91 89 88 84

Sanitation 36 49 82 74 75 35

Roads 34 95 77 54 51 65

Tele-density 62 537 438 416 231 61

 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 1996 to 2000-01 2000-01 to 05-06

Total Investment Rs.4,000 bn.- Rs. Rs. 7500 bn.

requirements in 4500 bn.
Infrastructure

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 Rs. 5000

Telecom Rs. 1000
Roads Rs. 1150
Ports Rs. 255
Urban Infrastructure Rs. 2800
Railways 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 Government
Socio-Political Risks: 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-Lease-
Transfer
• BOO: Build-Own- Operate
• BOOT: Build- Own-Operate-
Transfer
 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.
 BOOT: Build Own Operate
and Transfer
• 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.
Thank you