IDFC’s Vikram Limaye on the ‘Entrepreneurial Element’ of Private Sector Infrastructure Development in India

The Infrastructure Development Finance Company (IDFC) was set up in 1997 to spur infrastructure development in India. Entrepreneurs have played a leading role in this arena, IDFC executive director Vikram Limaye says in an interview with India Knowledge@Wharton at the recent Wharton India Economic Forum in Philadelphia. According to Limaye, while the government will continue to play a central role in infrastructure development, the private sector’s participation will only increase in the coming years. The growing aspirations and expectations of India’s middle class, he notes, will drive infrastructure development in the country. But Limaye also cautions that, due to the recent economic downturn, all countries are now focusing on developing their infrastructure. India, he says, will have to compete with the rest of the world to attract the necessary investments in infrastructure.

An edited transcript of the conversation follows.

India Knowledge@Wharton: When people think about infrastructure in India they often talk about roads, airports or other obvious stories. What do you think is an important story about infrastructure that is not being told?

Vikram Limaye: The issue that I would like to bring to everyone’s attention is entrepreneurship in infrastructure. That is something people should take a very close look at because it is a huge success story. The entrepreneurial spirit and the risk-taking ability of Indian entrepreneurs in infrastructure have been tremendous. There are all sorts of examples I can give you where people have gone and created world-class infrastructure [even though] they did not have all the approvals in place when they started. They invested hundreds of millions of dollars to buy the land and to create some of the ancillary infrastructure before [setting up] the core infrastructure, whether it was a port or a power plant. And that, in a sense, is the story of the private sector involvement in infrastructure development in India. There is a huge entrepreneurial element to it. If you look at the private sector involvement over the past couple of years, it has actually been 50% of the infrastructure build-out.

Going forward, the private sector will continue to play a very large role in infrastructure development in India for a variety of reasons. One, it does provide a commercial [rate of] return. Two, given the constraints the government has on resources and how much it can commit to infrastructure development, it necessarily needs the private sector to play a role. There have been a variety of risk-sharing mechanisms that have been configured in order to attract private capital to infrastructure development. So whether it is domestic or international developers, you will see increasing private sector participation.

India Knowledge@Wharton: Is that innovation concentrated in urban areas or does it spread out to rural areas as well?

Limaye: There is a regional aspect to it. If you look at the states that are the most developed, they are also the states where [developers] are comfortable doing business. There are certain states where people are uncomfortable doing business and those states have been laggards. That is one element of the regional disparity in terms of how infrastructure has developed. The second disparity is that certain states have a lot of natural resources, like coal mines, and have infrastructure development surrounding those resources. However, those states are [either] not that populated or are states that people are uncomfortable doing business in. And so their natural resources [get] used for development in other parts of the world.

India Knowledge@Wharton: Looking forward, how do you see the private sector participating in infrastructure development? You said it was going to play a large role, but do you foresee investments in infrastructure coming largely from the private sector instead of the government?

Limaye: Infrastructure is an area where government involvement is [a] key [factor]. Projects that get bid out are initiated by the government. For instance, there is a large road program that is being rolled out. That necessarily goes through a transparent bidding process. That bid process is managed by the National Highway Authority of India as it relates to highway development. For the state expressways, there is a separate process. But government involvement is key, which is why building capacity within the government is extremely important to get infrastructure development expedited…. Unless you have the technical, legal and financial capability within government to create a [support system] for bankable infrastructure projects that get bid out to the private sector, the private sector is not going to be able to go and pave a road from “Point A” to “Point B” on its own. So government involvement will continue to be strong. But private sector involvement and investments have already grown quite significantly over the past few years and will continue to be a very large part of infrastructure development going forward.

India Knowledge@Wharton: In terms of financing projects, how has the economic downturn affected IDFC and the industry in general?

Limaye: First, [let us talk] about the infrastructure landscape more broadly and how that was impacted by the downturn. Infrastructure development is very much a domestic story [but] the global downturn has [had] some impact because infrastructure development in India is dependent on international capital. To the extent that [international capital] is not forthcoming, it does affect the capital that is available to private sector developers.

The other aspect is from a longer-term perspective, or at least from a medium-term perspective. A few years ago, the infrastructure story was largely a China-India story. Post downturn, infrastructure development has become a global theme. Even the United States is focused on infrastructure development, as are other developed parts of the world. This means that Indian infrastructure projects have to compete with infrastructure being developed in other parts of the world — whether it is for capital or for technology or for a developer’s interest. If a developer has an option between developing a turnpike in the United States versus developing a road in India, the risk-return trade-off has to work for an international developer to focus on India.

India Knowledge@Wharton: If you had to prioritize infrastructure project financing in urban areas, what projects would be the most critical?

Limaye:I would say urban transportation, power, water and sanitation. Those would be the areas to focus on.

Knowledge@Wharton: Now moving that to the rural regions, how would you prioritize financing?

Limaye: In the rural areas, connectivity is again critical. Having roads is also extremely important…. From a macro perspective, the two largest opportunities for infrastructure in India are power and roads. Just look at the huge deficit that we have in the country today: More than half the country does not have electricity. Two percent of the country’s roads are national highways carrying 40% of the traffic. Power has a huge deficit, whether it is in rural or urban areas. Even in many [large and mid-sized] cities, you don’t have 24-hour power. There is load-shedding even in metros. Power is critical if we have to grow at 8% plus GDP. You can’t grow without power.

India Knowledge@Wharton: Looking ahead five years or even 10 years, how do you envision infrastructure in India? What kinds of changes are we likely to see?

Limaye: It is useful to look back and get a sense of how some of the infrastructure sectors have developed over time. Telecom was the first sector that was liberalized in the late 1990s. And the telecom experiment has been a huge success. Today, the telecom industry in India is huge and [the country’s] telecom [billing] rates are the lowest in the world. We are adding 10 million subscribers a month. Even a street vendor has a mobile phone. The telecom success [story] can be replicated in many other areas — primarily in power and roads where [there are] huge opportunities. [The telecom story shows] that the expectations of the middle class are quite high and that people are willing to pay for quality infrastructure. Initially, there was some skepticism if people would pay [road] tolls. But the experience has been that people are more than happy to pay tolls … because you are able to get from “Point A” to “Point B” a lot faster and on a much better road…. It cuts down travel time and fuel costs…. People are willing to pay for quality infrastructure. The rapidly developing middle class will transform many of these areas the way telecom or media or some of these revolutions have [occurred] in the country.

I don’t think people will have an issue provided they see that their money is really being used for productive purposes. The problem with government expenditure in India is that there is a lot of leakage. That is another reason the involvement of the private sector in developing quality infrastructure is critical.

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