The reason can be just that the market is taking time to warm up to a new investment vehicle or there can be other issues such as complexity of regulations. It is crucial that regulators continuously work with the investment community to make financial vehicles useful and relevant for investors.
In the US, the combined equity market capitalisation of the FTSE NAREIT index in April 2017 was more than $1 trillion. The ability of well-structured and effectively-regulated financial vehicles to mobilise capital is significant and such platforms need to be continuously improved with changing market dynamics to assist private capital to invest in infrastructure. Constant feedback from the stakeholders and effectively utilising the feedback to develop regulatory frameworks will be critical to expediting infrastructure creation.
Also consider construction phase risk. Private capital, especially foreign capital, should not have poor experience with greenfield projects and construction phase risk. Over the last few years, we have seen investments pick up in Indian infrastructure. Private capital has primarily focused on well-performing brownfield assets.
Greenfield risk-taking by private capital should be a gradual process. Allocation of risk in infrastructure is crucial to the success of the investment. Allocating construction risk to private capital, at least to start with, is probably not ideal to expedite infrastructure creation. Government involvement in the construction phase is crucial.
Given the greenfield infrastructure creation required across the spectrum in natural gas pipelines, logistics, power transmission, water, and roads among others, the government is probably the best placed to undertake the construction phase. Private capital can come in at a later stage.
Next, the contract enforcement regime in India must not be perceived to be weak by private capital. Stronger legal institutions and robust regulations will be critical to boosting private capital investments in infrastructure. Policy consistency around contract enforcement is essential. Private investors must not perceive that the rules of the game change during the game.
Infrastructure investments require significant capital to be committed over long periods of time. For India to indeed attract capital into the economy above and beyond the basket of brownfield assets that have been monetised recently, a robust policy mechanism must be in place. Once a policy is formulated, and an investment is made under the existing policy, any changes in the future to the policy should not affect past investments.
Investor perception of policy changes influencing long-dated infrastructure projects creates pricing inefficiencies in the market. The risk premium the investors charge is high to compensate the investor for the risk. The high premium charged leads to fewer bankable projects, thereby reducing the pace of infrastructure creation.
Munger's mental model of inversion helps us to create a common-sense approach to infrastructure creation. While the to-do list seems rather simple, experience has taught us that ground level execution requires diligent work.
For the Indian infrastructure ecosystem, it is essential to realise that working and engaging with all stakeholders is vital to expedite infrastructure creation. While multilateral agencies can lead the way, the need for rapid infrastructure creation in a growing economy will need private capital to play a significant role independently.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. The views expressed are personal)
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.