FDI And Infrastructure Development

FDI and Infrastructure Development

One of the many areas in which foreign direct investment can benefit a country or any entity, for that matter, is that of development of infrastructure. It has been observed over the years, that a lot of countries as well as other recipients of direct investment from overseas entities have used that money in order to develop the infrastructural facilities at their disposal.

All the various types of infrastructure that are at the disposal of a country like health or education, for example, may be benefited by foreign direct investment.

Technological infrastructure is one of the many areas in which foreign direct investment is meant to benefit a country. With the help of foreign direct investment being made in a country the government can construct, as well as, improve the existing technological tools at their disposal.

This in turn also plays a very crucial role in the economic development of a country as this technological advancement assists a country in upgrading its industries and thus helps them to face the challenges of the contemporary global economy.

Foreign direct investment is also capable of upgrading the health infrastructure of a particular country. This could be done by way of providing high-end equipments or medicines.

Such investment is normally made by the world level organizations in countries that are economically backward and have no or little medical infrastructure to speak of. For years, the World Health Organization, as well as the World Bank and the International Monetary Fund have been providing a number of the economically backward countries, all over the world and especially in Africa, with money and medicines in order to eradicate critical diseases or improve the medical infrastructure in place.

Communication infrastructure is an important area where the foreign direct investment can come in handy. The money that is invested in a country by overseas entities can be used for the construction of roads, railways and bridges.

These facilities are used for establishing connections with the remote areas of a country and for transporting important services to these parts like medicines and aids at times of floods or other natural disasters. A lot of construction groups are taking active interest in developing the communicational infrastructure of other countries.

Foreign direct investment is also used for the purpose of educating the unskilled labor force that is present in a country. In India during the later stages of 80s and 90s there was a situation whereby there was a huge labor force but it was mostly unskilled and was employed in the unorganized sector.

It was possible with the help of the financial assistance from the overseas direct investors to train these people so that they may be capable of being recruited into the industry. Foreign direct investment is also useful for executing mass educational programs that can educate those people who remain out of the bounds of conventional and institutional education as they are not able to afford it or it may not be available in their areas.

Privatisation of infrastructure development

India’s infrastructure deficit, whether congested roads and ports, inadequate hospitals or wastewater treatment facilities, and slow trains is a key factor constraining rapid, competitive growth and job creation and thereby imposing huge costs on society. Low productivity, poor competitiveness, high costs, and the slow pace of urbanization are some of the consequences of this deficit.  

In this context, PPPs in infrastructure represent a valuable instrument to speed up infrastructure development in India. If India already represents the largest PPP market in the world, there has been a large decline in private investment in PPP projects in recent years for a number of reasons, including delay in project approvals and land purchase by the government, complicated dispute resolution mechanism in concession agreements and lower than expected revenue due to aggressive assumptions.



Impact of PPP in the context of lack of infrastructures

The issue of lack of infrastructure in India is highlighted by the World Economic Forum, according to which the global requirement for infrastructure spending over the next 20 years is at least USD 40 trillion i.e. USD 2 trillion per annum. With all other commitments and responsibilities, it is undisputable that the states are not well sufficient to fully finance the same and hence the need for PPP becomes apparent. The importance of PPP infrastructure sector can be showcased by the fact during last 25 years, over 1000 projects worth at least USD1 trillion have been completed under PPP basis as pointed out by KPMG in one of its last study.

In order to revive the dilapidated infrastructures, according to the last data available from the Wold Economic Forum, the governments globally need to spend about USD 2 trillion annually over the next twenty years. In the context, PPP may help in maximizing the economic value of the project due to the dominant expertise of private party, increasing the efficiency of the project by way of judicious allocation of risks and responsibilities and boost the development of technology and capital starved sectors.

The increasing impact of PPPs can be estimated from the fact that in 11th five years plan 292 projects worth Rs2.4 lakh crore are being implemented and 404 projects worth Rs.3.8 Lakh crore are expected to be awarded in mid-term as mentioned by the Indian Construction Sector on its website. The maximum share of 35.4% and 15.9% has been granted to the road and ports sector respectively. In all cases, leading states have been noticed by the PPP central office which has noticed that among these states you have Karnataka, Andhra Pradesh and Madhya Pradesh which are the leading states in terms of number and value of PPP projects. At the central level, the National Highway Authority of India (NHAI) is the leading user of the PPP mode al.

Regarding India, let us acknowledge and salute the huge efforts made to create the right enabling environment for the PPP. These relate to enacting new legislation, as for example, the Electricity Act, 2003, the amended National Highways Authority of India Act, 1995, the Special Economic Zone Act, 2005, and the Land Acquisition Bill. As also the creation of new institutions like regulatory authorities in telecom, power and airports, implementing authorities like the National Highways Authority of India (NHAI), and financial institutions like the Infrastructure Development Finance Company, the India Infrastructure Finance Company and so on. A slew of model concession agreements across sectors created the template for private participation.  

On the other hand, as pointed out by several Committees and Reports, there is a sharp decline in private investment in PPP projects in recent years principally because of delays in project approval as pointed out by a Moody’s report (Moody’s Investor Service). Delay in project completion has resulted in cost overruns and revenue losses to private concession owners. The same report also point out the fact that the poor performance of some infrastructure projects, including PPP, has been a source of stress for both developers and the Indian banking system.  

Among the numerous recommendations, the Report on 19 November 2015 from the Committee on Revisiting and Revitalising Public Private Partnership (PPP) Model set up by the Union Ministry of Finance pleaded for a consistent and transparent legislative and institutional frameworks which will lower the risk of adverse changes that can reduce market confidence and deter investor participation. Indeed, in many countries, PPP-specific laws are not strictly required to make PPPs legal, but have been introduced to encourage them as a model for delivering public infrastructure. In South Korea, for example, the PPP Act and the Enforcement Decree regulate the procurement of PPP projects, including a “Basic Plan for PPP,” which provides a detailed implementation process and defines the roles of associated parties. In Europe, France and Greece have laws that accelerate the implementation of PPPs. In the developing world, there are PPP facilitation laws in Angola, Benin, Mauritius, Fiji and Honduras.

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