May 31 – It is generally believed that India’s infrastructure is bad, especially when compared to the impressive infrastructure of China. International observers like to explain the current reality as a result of the differences in political systems: India being a democratic country and China being officially communist. India’s bureaucratic hurdles, the numerous decision-makers, and powerful lobbies tend to make the country’s decision process somewhat tedious. In China, meanwhile, the political elite are deciding on the infrastructure projects and, in absentia of a civil society, implementation is quicker than in most other countries.
However, maybe these traditional assumptions are wrong and democracy can provide a leverage which is not as readily available in China: the private sector. In China, as in India, public infrastructure projects are decided by the government. In both countries, they are carried out by state-owned companies, but the Indian government also has the option to attribute them to the private sector. Private sector firms might be able to provide the pull to upgrade the infrastructure at a quicker speed than expected.
A study commissioned by the Asian Development Bank (ADB) shows India outscoring China and Japan to rank third in the performance of public-private-partnership (PPP) projects among Asia-Pacific nations. The report measures each country’s efforts to involve the private sector in infrastructure development. The ADB’s 2011 Infrascope Report, which was prepared by the Economist Intelligence Unit, specifically points out that “China is distinctive in lacking of PPP-specific institutions, with such projects handled in a similar fashion to state infrastructure projects.”
Meanwhile, the report points out that, in India, “there is no PPP act at a federal level, leading to a certain amount of disconnect and regional variation (some states have their own PPP policies or acts); however, in recent years, several national bodies have begun to be seen as components of the institutional structure for PPPs, such as the Committee on Infrastructure (chaired by the prime minister); the Planning Commission; and the PPP Unit of the Department of Economic Affairs.”
It is of importance to note that the state of Gujarat, one of the most attractive FDI destinations, is considered to be the best destinations in India for PPP projects. The legal framework is solid and the Gujarat Infrastructure Development Act (1999) sets a comprehensive framework for a variety of projects. The infrastructure assignments are awarded through competitive bidding.
It will be interesting to see how India can use this unique capacity to improve its infrastructure.
Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in India. For more information, please contact email@example.com, visit www.dezshira.com, or download the firm’s brochure here.
Investing in India’s Public Private Partnerships
In this issue of India Briefing, we look at the different sectors open to investment, including roads, rail, airports, ports, telecommunications and power, and also review some of the investment vehicles and financing options available for public-private partnerships in India.