Scenario of Infrastructure development in India
India's economy has shown extraordinary growth over the past numerous years and many overseas economists predict a strong growth in the near outlook. A private global forecasting firm predicts that India's GDP will grow at an average annual rate of about 8 per cent between 2010 and the year 2015.
India's investment reforms, rapid economic growth and social development have led to a flow in foreign direct investment (FDI). Annual FDI in India grew from $636 million in 1991 to $26 billion in 2009, making India, the third largest destination of FDI in the world.
Trends in Indian road sector
' Government policy to increase private sector participation has proved to be a boon to the infrastructure industry with a large number of private players entering the business through the Public Private Partnership (PPP) model.
' The type of PPP models used in road projects are Build Operate Transfer (BOT ) toll and BOT annuity
' With the Government of India permitting 100 per cent FDI in the road sector, most foreign companies have formed partnerships with Indian players to participate in the sector's growth story.
' Infrastructure is the key to supporting double-digit GDP growth in India during the medium- to long-term. The government has hence made infrastructure development a key policy issue and plans to spend USD1.0 trillion during FY13-17 on the sector.
' Through Five-Year Plans, India has increased the length of national highways from 21,378 kilometres during the late 1940s to 71,772 kilometres by the end of the 11th Five-Year Plan (FY08-12).
' The total length of national highways is expected to touch 85,000 kilometres by the end of 12th Five Year Plan.
A number of reasons can explain India's pleasant appearance to foreign direct investment.
' Comparatively cheaper employment.
' Governments in all states are keen for financial support their local economic growth and have become more and more friendly to overseas investors.
' The economic and social factors that used to be considered as hindrance have been considerably enhanced in recent years. Governments have been making investment in transportation development to keep pace with the national economic growth.
' India became a member of the World Trade Organization (WTO), gives India access to the dispute resolution process in the WTO and makes it easier for reformers in India to set in motion the liberalization policies.
Private Participation in Road Sector
A public'private partnership (PPP) is a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP (P3).
PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer. In other types (notably the private finance initiative), capital investment is made by the private sector on the basis of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make it more attractive to the private investors. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by removing guaranteed annual revenues for a fixed time period.
PPPs do not mean reduced responsibility and accountability of the government. They still remain public infrastructure projects committed to meeting the critical service needs of citizens. The government remains accountable for service quality, price certainty, and cost-effectiveness (value for money) of the partnership. Government remains actively involved throughout the project's life cycle. Under the PPP format, the government role gets redefined as one of facilitator and enabler, while the private partner plays the role of financier, builder, and operator of the service or facility. PPPs aim to combine the skills, expertise, and experience of both the public and private sectors to deliver higher standard of services to customers or citizens. The public sector contributes assurance in terms of stable governance, citizens' support, financing, and also assumes social, environmental, and political risks. The private sector brings along operational efficiencies, innovative technologies, managerial-effectiveness, access to additional finances, and construction and commercial risk sharing.
Not all projects with private sector participation are PPP projects. Essentially, PPPs are those ventures in which the resources required by the project in totality, along with the accompanying risks and rewards/returns, are shared on the basis of a predetermined, agreed formula, which is formalized through a contract. PPPs are different from privatization.
While PPPs involve private management of public service through a long-term contract between an operator and a public authority, privatization involves outright sale of a public service or facility to the private sector. A typical PPP example would be a toll expressway project financed and constructed by a private developer.
A PPP project is essentially based on a significant opportunity for the private sector to innovate in design, construction, service delivery, or use of an asset. To be viable, PPPs need to have clearly defined outputs, avenues for generating non-governmental revenue, and sufficient capacity in the private sector to successfully deliver project objectives.
There are usually two fundamental drivers for PPPs. Firstly, PPPs enable the public sector to harness the expertise and efficiencies that the private sector can bring to the delivery of certain facilities and services traditionally procured and delivered by the public sector. Secondly, a PPP is structured so that the public sector body seeking to make a capital investment does not incur any borrowing. Rather, the PPP borrowing is incurred by the private sector vehicle implementing the project and therefore, from the public sector's perspective, a PPP is an "off-balance sheet" method of financing the delivery of new or refurbished public sector assets.
The Government of India defines a P3 as "a partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity is with the private partner/s) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms and in which the private partner has been procured through a transparent and open procurement system."
The union government has estimated an investment of $320 billion in the infrastructure in the 10th plan. The major infrastructure development projects in the Indian state of Maharashtra (more than 50%) are based on the P3 model. In the 2000s, other states such Karnataka, Madhya Pradesh, Gujarat, Tamil Nadu also adopted this model. Sector-wise, the road projects account for about 53.4% of the total projects in numbers, and 46% in terms of value. Ports come in the second place and account for 8% of the total projects (21% of the total value). Other sectors including power, irrigation, telecommunication, water supply, and airports have gained momentum through the P3 model.
Models of PPP adopted for Highway sector in India
The two models of PPP adopted in India for the development of National Highways are BOT (Toll) and BOT (Annuity).
(a) BOT (Toll) Model: In the BOT (Toll) model, the Concessionaire recovers his investment by charging toll from the users of the road facility. This model reduces the fiscal burden on the government while also allocating the traffic risk to the Concessionaire. This is the model used for most of the projects and can be regarded as the default model for highway projects.
(b) BOT (Annuity) Model: Under a BOT annuity model, the Concessionaire is assured of a minimum return on his investment in the form of annuity payments. The Concessionaire does not bear the traffic risk and the Government bears the entire risk with respect to toll income.
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