It is widely acknowledged that one of the major sector in any country is infrastructure sector in terms of growth. The question lies why infrastructure? And why not any other sector?. These are certainly the debatable issues when it comes to allocating the major part of the fiscal budget to this sector. There are different views from different players when it comes to investment in infrastructure sector. In developing countries like India where there is a lot of potential for development, the infrastructure plays a key role in paving the path to country’s growth, so it is important to develop a proper mechanism for financing the infrastructure projects be it power and gas, hospitals, roads, education etc. Investment in infrastructure is one of the costliest affairs and owing to the high cost it is very crucial to decide which sector within the infrastructure sector should the investment be made so that the project generates enough cash flows to cover up the cost of the project.
The government plays a two facet role i.e. of investor as well as the financer of the infrastructure projects and it is also interesting to know how this investment cum finance would generate the cash flows so that the cost incurred by the government in the financing of its own investment gets covered up. If a government finances a particular project it either does it partially, fully or it outsources it through a mechanism called PPP. Because of high cost involved the financer of the project estimates the cash flows carefully so that a decision criteria is formulated using appropriate “Capital Budgeting Technique” and the most popular technique which is widely used in practice is NPV( Net Present Value ) on the basis of which a project may be accepted or rejected. Although it does not give a relative comparison between the two or more projects in terms of its cost but it gives the investors decision basis by comparing the present value of future cash inflows and the cost of project.
The major issues that arise in project financing are the high cost and high degree of risk involved in it which is contingent on various factors such as the inflation and the market conditions prevailing in the future. So in order to minimize the risk one can share risk and this is where PPP model (public private partnership) comes into picture in which the government and one or more private sector company enters into the business venture for the mutual benefit of government , the private company and public who will be utilizing the benefits out of the investment. Typically, a private sector consortium forms a special company called a "special purpose vehicle" (SPV) to develop, build, maintain and operate the assets for the contracted period. In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV. It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. So we can say that this model helps the government to enhance the quality of infrastructure through outsourcing its work to private sector by way of ventures which transfer the risk and also reduces the huge project cost.
The roadmap to the growth of Indian economy as a whole is dependent on how the infrastructure is developed and what benefits public derives from it. Infrastructure Sector Growth Rate in India’s GDP has been on the rise in the last few years. The Growth Rate of the Infrastructure Sector in India’s GDP has grown due to several reasons and this in its turn has given a major boost to the country's economy. The Growth Rate of the Infrastructure Sector in India’s GDP increased after the Indian government opened the sector to 100% foreign direct investment (FDI). This was done in order to boost the Infrastructure growth in the country. The result of opening the sector to the private sector has been that Infrastructure Sector Growth Rate in India’s GDP has increased at a remarkable rate. The example that we can see with reference to this model is the Terminal-3 of Indira Gandhi International Airport, Delhi which was built under PPP.
So it is crucial for the government to decide the appropriate model of financing or investing in infrastructure as it directly impacts the infrastructure development rate which in turn reflects the GDP growth rate.
