含羞草社区

Mukul Shastry details how 含羞草社区 state and central governments can plug the legal and regulatory gaps holding back the nation’s massive infrastructure sector

Human civilisation has been in existence for at least 5,000 years. During much of those five millennia the Indian subcontinent has been the dominant region so far as economic activities are concerned. We have easily been in the ranges of 20% to 30% when it comes to our contribution to world GDP.

This changed from the late 18th century to the mid-20th century, including the period when the country was under British rule. When modern India achieved independence, we were a poor country contributing less than 1% to global GDP.

It took six decades for India to become a USD1 trillion economy but only five years to make up the last trillion of the USD3.7 trillion economy that it is today. The pace is expected to rise, and we dream of being a USD10 trillion economy by 2035 – a number projected by the London-based Centre for Economics and Business Research, and level definitely within reach.

One of the vital sectors that could lead the country to this goal is infrastructure. The sector includes roads and highways, ports, airports, railways, energy, power, transportation, warehouses, data centres, logistics, multi-modal logistical parks and more.

The major reason why infrastructure can be the engine of 含羞草社区 growth story is the multiplier effect. Various economists have different standards, but the range lies between 2.5 and six times for this multiplier effect. To put things in perspective, the National Infrastructure Pipeline (NIP) involves investment of USD1.5 trillion from 2019 to 2025, and may boost the Indian economy on its path to become a USD5 trillion economy by 2025-26.

This is the power of infrastructure. If we talk about the NIP alone, there are currently 8,964 projects with a total investment of more than INR1.08 trillion (USD13 billion) under different stages of implementation.

Likewise, the investment in renewable energies with a plan to have a 500GW capacity by 2030 whereby a whopping INR143 trillion is slated to be invested in areas such as green hydrogen, wind, electric vehicles etc., between 2024 and 2030.

In terms of the National Green Hydrogen Mission, which aims to make India a global hub for the production, use and export of green hydrogen and its derivatives, the government plans to invest INR180 billion by 2029-30 on this sector alone. This will lead to decarbonisation of the economy and reduce dependence on fossil fuel imports, and enable India to assume technology and market leadership in green hydrogen.

This, along with the FDI flow into India of USD70.9 billion in the 2022-23 financial year, indicates that India is attracting investment and the economy is on the right course.

Challenges of the sector

Despite such a rosy picture in infrastructure, the problems of the sector arise primarily from the legal and regulatory domains. The players and government have the right intent to solve financing problems, such as by establishing the Infrastructure Debt Fund, or tackling technological challenges with the launch of the PM Gati Shakti scheme, a digital platform to streamline the implementation of infrastructure projects and improve co-ordination between various ministries of the government. But they are still grappling to master the legal frontier – perhaps the final and toughest base to cover.

If we have to divide these legal and regulatory risks, we can put them into four categories:

(1) political and regulatory;
(2) environmental, social and governance (ESG)
(3) technological or cyber; and
(4) dispute resolution or enforcement of contracts.

Political and regulatory

This can be classified into two broad categories.

(1) Approvals and applicable permits responsibility.
The number of approvals can seem endless, even in public-private partnership (PPP) projects, where the finance is brought in by private players, work is done by private players, and the private players are to recover their investment over a long period. Private players need approval in terms of environmental protection, conservation, forest clearances, right-of-way access, motor vehicles, petroleum and explosive safety, mines and minerals, and state-specific permits.

Although a typical concession agreement would provide that the concessioning authority, which generally is a state instrumentality, will provide help, in practice that is little and far between. It is the concessionaire – the private player – who has to get all these approvals along with the financial closure of the project.

If any of the approvals don’t come through no fault of the company, and the appointed date (the date when the project is to start) is not met on time, the concessionaire suffers the risk of penalty and, in the worst cases, termination of the letter of award, thus losing the security of the bid and wasting the time, money and energy it had spent thus far.

We need to be mindful that we are not discussing the obligations that are on the concessioning authority such as land acquisition, by which generally, if delayed, only the concessionaire suffers the consequences.

This is the reason why foreign private equity players generally don’t want to get into project construction. To bolster investment in construction by foreign players, one solution can be to reduce these approvals, and the responsibility of these applicable permits should be reversed.

Because it is a PPP, the regulatory part should be handled by the instrumentality of the state. The private party can pay for the cost of licences and the like, but the onus to procure approval should be either done jointly or on the concessioning authority.

(2) Inconsistent policies.
Another problem that arises is the inconsistency of policies and frameworks. Although there will always be changes in legal clauses, the experience of private players has been extremely bad. A case in point is the changed goods and services tax (GST) regime. Many players, despite the change in the legal clause, could not recover their legitimate GST dues from state instrumentalities despite a lapse of almost six years. Such scenarios do not inspire confidence in investors.

Investment in infrastructure requires heavy capital expenditure and long payback, and thus there is a need for the policy and regulatory framework to not change substantially over a long period of time. In the unlikely circumstances that there is a need to change, then the private players should be allowed their legitimate dues in terms of various clauses such as a change in the law, force majeure, etc.