Much of India is still underdeveloped and badly in need of infrastructural development to raise the standard of life of the people living there. Even after 62 years, looking at the situation of infrastructural development and government investment, it can be safely concluded that the way ahead is PPP. Here structured finance has a major role to play. The core concept here is that the government selects those regions of the country which with some investment can be most easily shifted towards an urban region. Thereafter instead of funding the entire investment, the government invites corporate bodies to invest in these projects.
An SPV, consisting of representatives from both the government and the private parties, collects these investments and fixes the rate at which the investors are to be repaid. The repayments are generated by the means of increased level of taxes of all forms specific to that region. The increased taxation need not necessarily be due to increased rate of taxation but because with development more people get jobs, people earn more, consume more and the overall standard of living improves.
The contract is for a certain number of years, during which the corporate body may also be given some benefits in the form of land/license to operate in the region in preference over any other company. Besides the government acts as a guarantor whereby if the required ROI is not earned by the private player(s), government pays the remaining amount.
A third party, the trustee/consultant to the project oversees the progress of the infrastructural projects and the overall development of the region, to ensure that the money is used properly.
The diagram below summarizes the structure of the project.
The advantages of such a project are many but one must be cautious while judging them as the implementation may be difficult given the current state of bureaucracy and corruption in the country. The major issues that may arise possibly are:
- Opposition to private investment in development projects with profit motive
- Delay in project completion
- Wrong selection of villages resulting in the requirement for a longer period to earn revenues
- Public resistance and evasion of taxes
- Unethical and monopolistic behavior of investing company due to preferences given to it
- Improper usage of allocated funds
- Delays due to red-tapism
- Changes in government and/or policy
- The project requires changes in some laws and taxation policies which may be opposed
- It is difficult to estimate the number of years it will take for the required ROI