Infrastructure Sector in India

MODULE 02
Definition of
Infrastructure

• The term infrastructure first appeared in the late

1880s. It is derived from French, with infra meaning
below and structure meaning building.
• Infrastructure can mean the foundation upon which
the structure of an economy is built.
• the word “infrastructure” was first used by the
North Atlantic Treaty Organization (NATO) allied air
forces in the 1950s. Ground facilities including
runways are necessary for air forces to function, as
well as airplanes.
• These facilities were called “infrastructure,” in
contrast with airplanes. Subsequently, this
collectively seems to mean not just air force
facilities but social support facilities worldwide.
Characteristics of Infrastructure
(ii) Shared use: To own and operate
infrastructure individually costs
(i) High demand: Infrastructure
much and is technically difficult.
services are generally greatly
Therefore, society must share it.
needed and difficult to replace. For
For example, we have no choice
example, water provided by a
but to share the source of a water
water supply system is essential.
facility and water main supply
pipes.

(iv) Non-excludability: In
infrastructure like ordinary roads, it
(iii) Non-rivalness: Unlike general is technically difficult to charge
goods and services, service of only users of the service, cars or
infrastructure is not something pedestrians, and even if we did, it
that one has and others do not; as would lead to both direct and
long as there is no congestion, indirect costs, which result in huge
many can utilize it at the same public loss. It is impossible to
time without competition. charge individual users or to
exclude free riders
 (vii) Regional
monopoly: Generally
speaking, the (viii) External effects: In some cases,
(v)Enormous (vi) Decreasing service of it has indirect influences on far more
investment: average cost: In the infrastructure holds people in broad areas for a long
Generally speaking, services of a monopolistic time, as well as on users who
it costs an enormous infrastructure, the position in a region, receive the direct services. For
amount of money to fixed cost like as an investment example, when a new railway is
construct construction cost is and the operation opened, not only the users but also
infrastructure, and much bigger than costs are enormous, the whole community, whose traffic
financial the variable cost, and it is utilized becomes more convenient, enjoy its
arrangements are which depends on together in a benefit and flourish
impossible for a the number of community together.
private body alone. service users. Besides, the service
Therefore, the total is essential for the
cost (fixed and users. Therefore,
variable cost) per some public
user gradually regulation is
 Job creation and capital circulation

Despite various technological

MULTIPLIER advancements, infrastructure
development is still a labour-
EFFECTS OF intensive endeavor.
INFRASTRUCTU
Infrastructure construction generates
RE massive employment across skilled,
DEVELOPMENT semi-skilled and unskilled work
force.

It also circulates cash in the

economy in form of wages paid to
the workforce.
 Infrastructure like roads, highways, electricity,
healthcare, water supply, digital networks, etc
raise the living standards of people.

Better connectivity through the highways brings

Upliftment of better opportunities to the people living in smaller
towns and villages.
the living These facilities also enable people to learn, stay
standards of connected to the world, and utilize their time for
productive means.
people In today’s world digital connectivity has become a
must for education, healthcare, eCommerce,
administration, and personal relationships.

Infrastructure development is the key to bringing

the urban-rural divide.
 Service sector is contributing more that 50% in GDP as
Economic Survey 2021-22.

IT is the foundation of the services industry that

contributes around 50% to the country’s GDP.
Boost to Almost every major company in the world receives its IT

services and support from India. Digital infrastructure has made this
possible.
The transmission and distribution infrastructure in the
manufacturin country has ensured reliable electricity supply to the
country’s industries.
g sector Not only the services sector but also the manufacturing
sector has reaped the rewards of regular electricity
supply.
Highways ensure fast and efficient mobility of people,
raw materials, and goods.

Fast mobility is beneficial for both the manufacturing

industries as well as the service sector.
 As the manufacturing sector expands, it
looks for markets beyond the country’s
borders to sell the goods.
Highways, railways, seaports, airports,
warehouses, and cold storages play
Boost to important roles in enabling the country to
exports strengthen its export sector.
India intends to become a manufacturing
and export-oriented economy and become a
5 trillion-dollar economy by 2025.

Infrastructure sector will play a key role in

achieving this target.
Tourism promotion

Tourists want to visit places

where they can easily and
Better planned cities and
safely navigate. They also
efficient connectivity to the
want to spend less time
tourist places provide a big
traveling and more than at
boost to the tourism industry.
the places that they intend to
visit.

Urban planning plays a crucial

Seamless connectivity
role in making the cities safe,
through roads, highways, and
hygienic, and easy to
railways ensures the same.
navigate.
Environment protection and sustainability

carbon neutrality by 2070.

highways help in smooth and rapid mobility which in turn reduces the carbon emissions

plantations along with the highways also help in reducing the carbon footprint

Waste-to-energy plants help in reducing the garbage and the dependence on fossil fuels.

Blue infrastructure in the urban areas reduces the stormwater downflow and recharges
the underground water.

Green infrastructure absorbs CO2 and assists in mitigating the effects of global warming.

Water treatment and recycling help keep the water bodies clean and reduce the need for
potable water.
 Infrastructure financing involves
financing projects or companies
involved in sectors that are given
infrastructure status by respective
governments worldwide.

INFRASTRUCTU This definition is more for the

RE FINANCING government’s internal operations.

This definition is used to provide tax

breaks or subsidies that have been
promised to the infrastructure sector.
 TYPES OF INFRASTRUCTURE FINANCING
Economic:
infrastructure financing can be for purely economic reasons. For instance, when a new port is built in a
country, it enables more foreign trade. These projects are generally funded using a public-private partnership.
This is because these projects have net positive value. Hence, the value created can be shared between the
government and the private parties. Economic infrastructure projects benefit a region’s larger economy
instead of providing benefits only to specific industries or people.

Social: Infrastructure funding is also given to many institutions for a social cause. For instance, several projects
are undertaken to provide clean water to the people. Similarly, projects are undertaken to provide healthcare
and education services to the people of a region. These projects are different because they have to be
undertaken regardless of the fact that they might have a negative net present value. Hence, under other
modes of financing, these projects would be left out. However, when it comes to infrastructure financing, the
government does spend funds on these projects even though there may not be any immediate returns. Since
these projects may have a negative net present value, they are undertaken mostly by the government.

Commercial:
Commercial projects are just like economic projects. Except, these projects provide benefits to a set of people
that can be directly identified. For example, toll roads and metro rail projects are considered to be commercial
infrastructure projects. They are funded by charging the people who utilize the services.
SOURCES OF INFRASTRUCTURE
FINANCING

2. SUPRA
4. PUBLIC-
1. PUBLIC NATIONAL 3. PRIVATE
PRIVATE
FINANACING FINANCIAL FINANCE
FINANCING
INSTITUTIONS
SOURCES OF FINANCING
INFRASTRUCTURE PROJECTS
• Public Finance
• Government funding is one of the biggest sources of funding for infrastructure finance. Tax
dollars collected all over the world are spent in huge numbers on creating infrastructure. In
general, countries spend anywhere between 5% to 14% of their GDP on developing as well
as maintaining infrastructure.
• A lot of this money is spent on financially unviable projects which have social value for the
community.
• In many cases, the government does engage the private sector to execute the project on its
behalf.
• However, this may be done to increase the efficiency of the project. The private sector only
brings in the necessary expertise to deliver the project on time. In return, the government
provides all the funding when developmental milestones are completed. In essence,
governments worldwide use the services of the private sector as subcontractors.
• However, it needs to be understood that infrastructure finance projects funded by the
government are notorious for corruption. Since the taxpayer is paying the bill, a lot of the
time, the development charges are highly inflated, and all the money spent on these
projects ends up in the hands of mafia controlled by corrupt politicians.
• Supra National Financial Institutions

• Supranational bodies such as World Bank, International Monetary Fund,

Asian Development Bank, etc. are also important sources of finance for
infrastructure projects.
• However, such organizations tend to only fund projects which are financially
viable. As a result, urban projects like metro rails, bridges, flyovers, etc.
tend to get funded by these institutions.
• The internal rate of return (IRR) required by these financial institutions is
generally lower as compared to other private sector institutions.
• Institutions like the World Bank and the Asian Development Bank also
provide other services to enable the better execution of infrastructure
projects.
• This means that even if they do not directly fund a project, they try to add
value by providing advisory services such as loan guarantees, advisory
services for the creation of suitable policies, etc.
• In many cases, these institutions also provide treasury services to
infrastructure projects. This is done to enable optimal utilization of funds.
• Private Finance

• Governments all over the world are desperately seeking the

intervention of private money to help fill the funding gap
being faced for infrastructure projects.
• As a result, many private mutual funds have been set up for
this purpose.
• Governments try to make these investments more attractive
by providing tax breaks to individuals who invest their money
in such projects.
• A wide variety of financial instruments (both debt as well as
equity) are being used to help channelize the savings of the
general public towards infrastructure projects.
• Attempts are also being made to woo institutional investors
such as insurance companies and pension funds to increase
the amount of funding available.
• Public-Private Partnership

• The public-private partnership model is also widely used in infrastructure funding.

This model works differently than public funding.
• Here, instead of the government using its money for the initial outlay, the private
sector does so. The idea is to create a partnership, where the government brings
in land and other resources, wherein the private party brings in technical
expertise.
• The private party then has certain rights over the asset it has helped developed.
For some years, the government allows the private party to collect money in order
to generate revenue and payback its investment plus a reasonable amount of
profit.
• Then the asset is finally given back to the government, which can decide whether
or not they want to continue collecting revenue for the upkeep of the project. The
only problem with this model is that it can only be used to raise funds when the
underlying project is extremely viable i.e., provides an IRR that is sought after by
private investors. Otherwise, private investors will give it a pass.
• The simple fact is that extremely large sums of money are required for
infrastructure projects. One source of funding cannot really help fulfill the gap. In
fact, all the sources of funding, together, may also not be adequate. There are
many governments in the world who are trying to set aside as much money as
 Financing
Instruments

FIXED Assest- BONDS AND LOANS-

Project Bonds, Green Bonds, Municipal
Bonds/ Direct/ Co-investment lending
to Infrastructure Projects, Syndicated
Project Loans
MIXED Assest- HYBRID- Subordinated
Loans/Bonds, Mezzanine Finance
Equity- Listed/ Unlisted- REIT, IIT,
MLPs
LIMITATIONS ON THE PROCUREMENT
• Charging on Externalities is less feasible and desirable.
• Complex and involve large number of parties
comprising natural monopolies
• Cash flow after many years.
• Initial Phase of Infrastructure is subject to high risk.
• Uniqueness-Less liquid: purely private investment
difficult and costly
 Legal frameworks for private sector participation in infrastructure
development

Public-Private Partnership (PPP)

Concession Agreements: Concession
Models: India has adopted various PPP
agreements outline the terms and Regulatory Frameworks: Regulatory
models such as Build-Operate-Transfer
conditions under which private entities frameworks, including sector-specific
(BOT), Build-Own-Operate-Transfer
are granted the right to develop, regulatory authorities such as the
(BOOT), and Design-Build-Finance-
operate, and maintain infrastructure Telecom Regulatory Authority of India
Operate (DBFO) to encourage private
assets. These agreements typically (TRAI) and the National Highways
sector involvement in infrastructure
specify project duration, performance Authority of India (NHAI), provide
projects. These models delineate the
standards, revenue-sharing oversight and ensure compliance with
roles, responsibilities, and risk-sharing
mechanisms, and dispute resolution regulations in infrastructure sectors.
arrangements between the
mechanisms.
government and private entities.

Legal Reforms: The government has

enacted legal reforms to streamline
approval processes, expedite land
acquisition, and resolve disputes
related to infrastructure projects. Acts
such as the Real Estate (Regulation
and Development) Act (RERA) and the
Insolvency and Bankruptcy Code (IBC)
aim to enhance transparency,
accountability, and investor
confidence.
INCENTIVES

Financial Incentives: The

Risk Mitigation Measures: Risk
government offers financial
mitigation measures, including the
incentives such as viability gap
establishment of infrastructure debt
funding (VGF), tax concessions, and
funds (IDFs) and credit
low-interest loans to attract private
enhancement mechanisms, help
investment in infrastructure
mitigate risks associated with
projects. These incentives reduce
project financing and enhance
financial risks and enhance project
investor confidence.
feasibility for private investors.

Ease of Doing Business: The

Capacity Building: The government government is committed to
invests in capacity building improving the ease of doing
initiatives to enhance the skills and business in India by simplifying
capabilities of private sector regulatory processes, reducing
entities involved in infrastructure bureaucratic hurdles, and
development. enhancing transparency in decision-
Training programs, workshops, and making.
knowledge-sharing platforms foster These reforms create a conducive
collaboration and promote best environment for private sector
practices in project execution. participation in infrastructure
projects.
• Policy Support:
• Policy initiatives such as the
National Infrastructure
Pipeline (NIP) and the
National Monetization
Pipeline (NMP) provide a
roadmap for infrastructure
development and asset
monetization, offering
clarity and certainty to
investors.
Constitutional aspects: Allocation of jurisdiction
over different infrastructure sectors between the
Centre and State
• Central level • State level
• Items on which the Parliament • Items on which the legislature of
of India has exclusive power any state has power to make laws
include:
to make laws include:
• 1. Roads, bridges, ferries, and
• 1. Railways other means of transportation not
• 2. National highways under the Centre’s jurisdiction.
• 3. Major ports • 2. Water supplies, drainage and
embankments, water storage and
• 4. Airports water power.
• 5. Telecommunication • 3. Land rights, tenures and
revenue
The Constitution of India defines three types of municipalities

1. Nagar Panchayats for areas in transition from a rural area to urban area;

2. Municipal Councils for smaller urban areas; and

3. Municipal Corporations for larger urban areas.

Establishment of municipalities is done by public notification by the Governor of the state. States may, by
law, endow municipalities with the functions and implementation of certain items within their jurisdiction,
including:

1. Urban planning including town planning

2. Regulation of land-use and construction of buildings

3. Roads and bridges

4. Water supply for domestic, industrial and commercial purposes

5. Slum improvement and upgradation

• Municipal level
• Municipalities develop legal tools in the form of “Building
Bye-Laws” for structural design and construction (including
that of public infrastructure such as roads), to achieve
orderly development of an area.
• These bye-laws are developed while keeping the local
geography in mind, such as seismic zones and flooding risk.
• They incorporate standards developed by the Bureau of
Indian Standards (BIS). This is the national standard setting
body in India, established under The Bureau of Indian
Standards Act, 1986.
• Some BIS standards are made mandatory through building
bye-laws within the jurisdiction of the municipality, though
these bye-laws vary with each municipality.
Panchayat level
• Village panchayats are rural local bodies responsible for
some of the governance functions in their locality, as
defined by Article 243B of the Constitution of India.
• The states may (by law) endow panchayats with the
functions and implementation of
• 1. Roads, culverts, bridges, ferries, waterways and other
means of transportation.
• 2. Rural electrification, including distribution of electricity
• 3. Minor irrigation, water management and watershed
development
• 4. Drinking water
Distribution of Legislative Powers:
(Article 246)

The Constitution delineates the

distribution of legislative powers
between the Centre and the States to
avoid conflicts and ensure efficient
governance.
While the Union List empowers the
Centre to legislate on matters of national
importance, the State List grants similar
powers to the States over regional
subjects.
The Concurrent List allows both levels of
government to legislate on specified
subjects, subject to certain conditions.
 The allocation of
jurisdiction over
infrastructure sectors
reflects the
This division ensures
principles of
that both levels of
federalism enshrined
government have
in the Indian
Principles of the authority to
Constitution.
Federalism: address the needs
Federalism aims to
and priorities of their
balance national
respective
unity with regional
jurisdictions.
autonomy by
delineating powers
between the Centre
and the States.
Cooperative Federalism:

Despite the division of powers, infrastructure

development often requires collaboration and
cooperation between the Centre and the States.

Cooperative federalism encourages joint planning,

funding, and implementation of infrastructure
projects to leverage the strengths of both levels of
government.

Initiatives such as the National Infrastructure

Pipeline (NIP) and cooperative forums like the NITI
Aayog facilitate dialogue and partnership between
the Centre and the States to address
infrastructure challenges effectively.
Interpretation and Disputes
Resolution:

The interpretation of the Seventh

Schedule and disputes regarding
jurisdiction between the Centre and the
States often come before the judiciary,
particularly the Supreme Court of India.

The Supreme Court acts as the final

arbiter and interprets the constitutional
provisions to resolve conflicts between
the Centre and the States regarding
infrastructure projects and regulatory
authority.
Law making powers Allocation of
natural resources:
Article 39(b) and (c) of the
Constitution of India directs the
State to ensure that the
ownership and control of the Article 48A mandates the State
material resources of the to protect and improve the
Constitutional Provisions:
community are distributed to environment and safeguard
serve the common good. This forests and wildlife.
provision emphasizes equitable
access to natural resources for
the welfare of the people.

Article 73 and Article 162

While the Union has executive
delineate the executive powers
authority over matters listed in
of the Union and the States,
the Union List, the States have
respectively, regarding the
similar powers over matters in
administration of natural
the State List.
resources.
 The Mines and Minerals (Development
and Regulation) Act, 1957 regulates the
mining and allocation of minerals in
India. It empowers the central and
state governments to grant leases for
the extraction of minerals.
Legislative The Forest (Conservation) Act, 1980
provides for the conservation of forests
Framewor and restricts the diversion of forest
land for non-forest purposes without
k: prior approval from the central
government.
The Water (Prevention and Control of
Pollution) Act, 1974 and the
Environment (Protection) Act, 1986
regulate the use and management of
water resources and the protection of
the environment, respectively.
 The doctrine of judicial review allows the judiciary
to review the legality and constitutionality of
executive and legislative actions, including the
allocation of natural resources.

In the landmark case of State of M.P. v. Rakesh

Kohli (2012), the Supreme Court held that
natural resources, being public property, must be
Judicial distributed in a fair and transparent manner,
avoiding favoritism and arbitrariness.

Review The courts have often intervened to ensure that

the allocation of natural resources is in
accordance with constitutional principles and
statutory provisions.

Judicial review ensures that allocations are made

in the public interest and for the common good,
preventing any misuse or abuse of power by the
executive.
Administrative Law
• Administrative law governs the actions and decisions of
administrative bodies, including the executive, in the
allocation and management of natural resources.
• Administrative law principles such as fairness,
reasonableness, and non-arbitrariness guide
administrative actions related to resource allocation.
• The principles of natural justice, including the right to
be heard and the right to a fair procedure, are
fundamental to administrative law and apply to
decisions concerning natural resource allocation.