Excerpts from IIML Dialogue Session with Mr. Kumar Vinay Pratap

Excerpts from IIML Dialogue Session with Mr. Kumar Vinay Pratap

What are the various factors for the private sector to enter the infrastructure sector? What are the reasons that Government want to involve the private sector?

The most important factor is obviously to make money. Investment in infrastructure provides a good return. World Bank research carried out for telecom companies in Latin America and the Caribbean region found an IRR of 37% in the period of 1990 to 2000 as opposed to cost of equity of 14% in the telecom sector. Apart from this, returns in infrastructure are more stable as compared to returns in other sectors, which implies that the private sector would invest in infrastructure to reduce earnings volatility. Lastly, investments in developing countries are more risky compared to investments in the developed world; the multinational corporations try to enter into water-tight contracts that help them mitigate the risk but still it could be short of a higher rate of return.

Coming to the second part of your question, the reason for the Government to involve private players in the infrastructure sector is due to resource crunch. In India, there are capacity constraints in ports, airports, railways and roads. It is also expected that the private sector will provide the services more efficiently.

What are the major hindrances faced by private sector in entering infrastructure, operating in it and making a decent return?

Infrastructure investment is faced by large, upfront sunk costs. The returns are spread over a number of years, in many cases over thirty years. The hindrances that the sector faces are related to these characteristics of infrastructure investment - first is the policy framework, post-1990 the private sector has shown a lot of interest in investing in infrastructure. Post-1990 the legislative framework was changed to allow private sector to enter the infrastructure sector. Then, there is a question of sector viability. The telecom sector is quite viable. Over 500 billion since 1990 has flown into telecom. Another factor is the high project failure rate of over 9%.

Though the private sector may bring in efficiency in terms of reducing costs and increasing revenue, the initial gap between revenues and costs may be too large. There is also a risk of macro-economic shocks in the early years of a project's existence. Another important hindrance is the poor quality regulation of the sector. As infrastructure involves high upfront sunk costs, it's vulnerable to changes in rules of the game.

Are political hindrances also a factor in the operation of the private sector in infrastructure?

Yes, definitely. They affect water sector projects because they have a very high degree of political sensitivity. Similarly, for power distribution, when rates are increased, there is always a lot of opposition. As we saw in the Delhi power distribution privatization, it is difficult for private sector in power distribution and water projects.

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Contributed by -
Pankaj Bhatt,
Media Relations,
IIM Lucknow.

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