Transport Infrastructure in India: Challenges & Opportunities

Bridging the Gap in India's Transportation Infrastructure for Future Growth

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In the new millennium, India’s transportation infrastructure has expanded by leaps and bounds. The Golden Quadrilateral national highway network, the Delhi Metro rapid transit system, and several public-private partnership airport projects in India’s major metropolitan regions, including New Delhi, Mumbai, Bengaluru, and Hyderabad, to name a few, have not only revolutionised the capacity and quality of the country’s transportation infrastructure but have also fueled the growth of other major infrastructure projects, including the Bharatmala project national highway project, high-speed and semi-high-speed rail projects, dedicated freight corridors, rapid-transit metro railways across significant cities and airport modernisation.

Although India has significantly improved its transportation infrastructure over the last two decades, the country still has a long way to go to guarantee that it can meet the country’s needs now and in the future. Therefore, it becomes imperative to size the investment opportunities and explore the most prominent issues that are crippling India’s transportation infrastructure. Additionally, a closer look at the challenges that three groups of stakeholders—government agencies, concessionaires and contractors, and financiers—will face in capturing those opportunities also needs to be ascertained. Finally, the strategies these stakeholders can adopt to overcome the challenges can be summarised.

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Major Obstacles

India spends less money on transportation infrastructure than other developing nations. India, for example, has historically invested about 1% of its GDP in transportation infrastructure, whereas China increased its investments from 4.7 per cent of its GDP in 2014 to 6.5 per cent in 2017. Even developed countries with more mature infrastructure, such as France and Japan, spend roughly 1% of their GDP on transport infrastructure annually. Four significant problems are crippling India’s transportation infrastructure as a result of this lack of investment:

  • Inadequate Roads: Highways are the backbone of any developing sector or economy. Despite this, India only spent $38 billion on highway development between 2014 and 2018, or about 0.35 per cent of its GDP. In contrast, China has consistently invested about 1.5 per cent of its GDP in highways. The insufficient supply of infrastructure investments compared to demand has strained the country’s roads. Additionally, roads are the most important ways of transportation in India, accounting for 65 per cent of all freight movement. This puts massive pressure on the roads and highways, and limited capacity causes highway congestion and slower operating speeds. Because congested roads account for 8 to 10% of wasted journey time, network enhancements such as new motorways to augment the capacity of congested corridors, new economic corridors, and urban decongestion are much needed.
  • Social welfare obligations: Governments are frequently under social welfare obligations to subsidise public services at the price of businesses; for example, freight operations subsidise the cost of passenger journeys on railways. It may be noted that raising the cost of freight rail transport reduces its attractiveness, resulting in a modal shift away from railways, limiting the government’s ability to produce revenue, and limiting investments that could augment capacity, resulting in poor service on key routes.
  • Insufficient Airport Capacity: In the coming years, India’s aviation infrastructure will face a large supply and demand gap. Although initiatives such as the UDAN regional airport development tackle regional connectivity issues, airport capacity expansion remains a challenge, particularly in the metropolitan cities of Delhi and Mumbai, which account for nearly 55 per cent of total air traffic in India. Large cities are anticipated to require at least two to three airports in the future to address congestion problems while also providing passengers with world-class facilities. Developing new greenfield airports in Navi Mumbai and Jewar is a testament to this strategy and a step in the right direction.
  • Lack of public–private partnerships: Because India is a developing economy with limited financial resources, rapid transportation infrastructure development will necessitate private involvement. However, the difficulty and uncertainty in enforcing a ‘user-pays principle,’ as well as the risks involved with enforcing contracts, induce revenue uncertainties. Additionally, the country’s evolving concessionaire ecosystem, with a mixed record of success in public-private partnerships (PPP), has restricted private involvement in infrastructure projects—private investment accounts for only about 15% of total infrastructure investment. To sustain investments in India’s infrastructure environment, social acceptance and enforcement of user fees, as well as stricter contract enforcement and sustained improvements to the concessionaire ecosystem, will be required.

These are some of the primary causes of India’s poor logistics efficiency. India’s ranking on the World Bank’s Logistics Performance Index has deteriorated over time, falling from 35 in 2016 to 44 in 2018—underscoring the importance of addressing the infrastructure deficit. For example, India’s freight cost, which is one component of the Logistics Performance Index, is 13 to 14 per cent of GDP, whereas it is 9 to 10 per cent of GDP in other developed countries, highlighting the need for and potential economic effect of improving the country’s transportation infrastructure.

Addressing Challenges

Three groups of stakeholders—government agencies, concessionaires, and financiers—can address these challenges through a concerted and coordinated effort that addresses the following elements: sizing and evaluating the investment opportunity across sectors to identify the most appealing areas, understanding the challenges associated with capturing this opportunity, and strategising to overcome the challenges in order to maximise the opportunity entirely. 

  • Government Authorities: Project financing issues, clearance delays, land acquisition delays, and concessionaire and contractor non-performance all contribute to inadequate infrastructure coverage and quality. India’s transportation infrastructure in road, rail, air, and port infrastructure is both extensive and inefficient, highlighting the pressing need to enhance the quality and extent of the infrastructure. Project financing issues, timely land acquisition and clearances, and contractor non-performance have all exacerbated the situation.
  • Because of the large upfront capital expenditure needed, the primary challenge for government agencies is securing project funding. Typically, infrastructure development expenditures are incurred in the first two to three years, while income from the project in the form of user fees is collected over a period of 20 to 30 years after the project is launched. As a result, a large-scale infrastructure push will necessitate a mix of upfront public and private-sector financing. With the rapid evolution of technological interventions in infrastructure development, it is necessary to evaluate and prioritise investments based on total life-cycle cost and project returns rather than the needed upfront investment.

Finding the right partners for efficient, timely, and cost-effective project execution, as well as assuring high-quality asset maintenance and operations, are also essential and demanding works. For example, several significant transportation infrastructure projects have been delayed in the past due to poor performance by contractors and concessionaires. Additionally, poor pre-project preparation that results in a shift in scope during execution can lead to disagreements between government officials and concessionaires, disrupting project execution.

Monitoring the execution of ongoing projects is also a significant challenge for government agencies, given the country’s enormous size and the broad spectrum of infrastructure projects. Moreover, there is a lack of emphasis on monitoring execution quality using objective metrics. In addition, the absence of strong project management skills (aside from a few high-profile projects such as the Delhi Metro’s initial phases) leads to poor planning and delays. Defining the right metrics to review and monitor progress, as well as implementing cutting-edge technology, are essential components of monitoring on-the-ground execution. 

Delays in project execution also result in an increase in the costs needed to complete a project. For example, according to a Ministry of Statistics and Program Implementation report, delays in executing 205 Ministry of Railways projects have resulted in a $30 billion cost escalation, a 130 per cent increase over the original estimate.

The need for multiple statutory approvals from various agencies is also a significant bottleneck for any infrastructure initiative in India. For example, in March 2019, the Supreme Court suspended the environmental clearance for the Mopa Airport in Goa, and work was halted. The court ultimately lifted the ban in January, but the delay pushed the project back by nearly a year. Similarly, road, rail, and metro projects require collaboration among numerous government agencies to relocate utilities and construct railway overbridges, underpasses, and tunnels. Projects are sure to be delayed in the absence of a well-thought-out master plan with a cross-functional steering team or a single window approval.

Approvals from tribunals and litigations have been another issue that government agencies frequently encounter. Many urban infrastructure projects, such as metro rail systems, face difficulties in engaging local residents in order to alleviate their concerns about safety, pollution, and privacy. Delays in land purchase and clearance also result in project cost overruns, which leads to claims and arbitration by concessionaires. Several metro rail projects in Indian cities have escalated costs due to excessive land acquisition and construction delays. For example, the first section of the Bangalore metro can be considered a case in point, which was delayed by more than six years, resulting in approximately a $1.1 billion cost overrun.

The Right to Fair Compensation and Transparency in Land Accession, Rehabilitation, and Resettlement Act of 2013 resulted in a rise in the average land purchase cost for greenfield projects. As a consequence, those costs increased from 10% to 25% of total capital costs for road projects. This has had a major impact on the government’s capital requirements. Track doubling and tripling, as well as the laying of new railway tracks, are examples of how rising land costs affect project commercials, making them unviable. Multiple railway projects have become unviable as land prices have risen, accounting for roughly half of the total capital cost of laying a new route.

  • Concessionaires and Contractors: Concessionaires and contractors’ viability is impacted by issues such as project financing, timely clearances, operational disruptions, and user-fee collection. The primary issue for concessionaires is effective capital management. It is essential to have a complete portfolio perspective that reduces risk while increasing profitability. In addition, the availability of credit from financial institutions to execute big projects is a major obstacle in generating interest in infrastructure projects. The market credit crunch is harming concessionaires, particularly small to mid-size concessionaires, when it comes to raising money, causing project delays.

Concerns about timely approvals remain, as does the need for a robust structural mechanism to mitigate risks beyond concessionaires’ control. Delays occur at various project stages due to the need for approvals and clearances from an array of government entities, as well as unforeseen arbitration concerns. Given the size of the projects, excessive delays have frequently led to concessionaires going bankrupt.

The infrastructure construction sector employs more than 33 million people, second only to agriculture. However, the vast majority of this labour force is untrained. With this mix of labour and India’s expanding infrastructure projects, there is a severe shortage of trained labour to perform complex tasks such as tunnelling, boring, project planning, and design, particularly in urban areas. To achieve the desired level of quality in a cost-effective way, these complex activities necessitate extensive knowledge and expertise.

Another significant issue is enforcing fee collections and raising fares on time. An increase in user fees is a sensitive issue that can affect concessionaires’ recovery. Metro train fare increases, for example, have drawn widespread public and media scrutiny and, at times, resulted in lengthy arbitration and dispute resolution. Tolling disruptions in highway projects are also a concern. For example, a suspension in tolling during the recent COVID-19 pandemic has an effect on project revenues and concessionaire viability. Additionally, many initiatives have encountered difficulties in enforcing and collecting tolls. However, this is believed to be partly resolved with automated toll collections on highways via FASTag, NHAI’s electronic toll collection system.

Unpredictable occurrences also disrupt project planning, logistics, and feasibility. Natural disasters, such as floods, can cause initiatives to be delayed for years. For example, airport operations have recently been suspended due to flooding, resulting in substantial revenue loss for concessionaires. Similarly, as a result of geopolitical issues and trade conflicts, port viability can change dramatically in a short period of time due to a shortfall in the total quantity of commodities shipped through the port. A recent example is the COVID-19 pandemic, during which construction activities were stopped, causing most infrastructure projects to be delayed, resulting in higher project completion costs and lower returns.

  • Financial institutions: The lack of a strong legal and regulatory framework for early and efficient dispute resolution, as well as challenges in infrastructure valuation, have limited financial institutions’ involvement.

Investing in assets with revenue realisation risks is generally a source of constant concern for financiers. It is a difficult job to identify possible risks associated with infrastructure projects and to value the risk factor in the project appraisal. Non-performing assets can result from overlooking an essential risk or overvaluing the project. The problem of stalled projects and non-performing assets is well-known, and it continues to plague infrastructure-focused financial organisations. Revenue forecasts under various conditions must be carefully evaluated in novel scenarios such as greenfield airports in tier 2 cities and greenfield corridors of national highways with no history of tolls.

Despite the fact that large marquee projects requiring significant investments have been conceptualised, the government continues to finance the majority of the projects despite a constraint on overall spending power. In addition, there has been a lack of a stable regulatory model and a strong governance mechanism to create investor trust, resulting in a lack of interest from financial institutions in proactively designing new products for infrastructure funding for both the government and private concessionaires.

One of the primary causes of the mismatch between infrastructure demand and supply is financiers’ absence of visibility into the long-term pipeline of projects. Infrastructure financing is a complicated legal and financial process that necessitates extensive knowledge. Developing this level of expertise is expensive, and financial institutions will only engage in it if there is a clear pipeline of possibilities. Otherwise, the expense of building the capabilities will outweigh the benefits that financiers hope to gain by investing in infrastructure rather than other less complex asset classes. The government will need to define a long-term strategy with strong legal support that allows a variety of financial institutions with varied portfolios to join the infrastructure market without fear of arbitrary exercise of political power. Creating a national infrastructure pipeline is a positive move that should be accompanied by stronger financial and legal safeguards for financial investors.

Conclusion

India has attractive transport infrastructure possibilities, but there is much to be done across the spectrum of stakeholders to close the infrastructure gap. Successful projects must be studied and held up as models, with critical lessons learned shared among government agencies, concessionaires, contractors, and financiers. The supply-demand imbalance is too significant to close without effective collaboration, rapid execution, and rigorous monitoring and tracking. Today’s challenges can be transformed into opportunities that will not only boost organic development but also drive job creation and benefit a wide range of sectors. Still, they will also help fulfil one of the most fundamental tenets of economic and social activity: mobility to serve the common good with concerted and dedicated efforts.

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