FDI in infrastructure: need for sanctity of contract

By K. Ramachandran

CHENNAI, AUG. 2. The Union Government needs to make a conscious effort to correct the image of India being a `high risk country' to at least `medium risk'. Foreign investors should be made to understand that doing business with India should not be a daunting task - the ease of doing business is an essential pre- requisite.

Public sector investments in certain areas of infrastructure creation, needs to be reinstated, where the private sector interest will be low. Such areas include sewerage management, waste-water treatment and dredging. At the same time, policymakers need to ensure the availability and utilisation of long-term funding of 20-25 years from insurance and pension funds.

These were some of the macro-economic policy measures recommended by infrastructure experts at a two-day meet organised here last week by the Indo American Chamber of Commerce, Chennai, the HUDCO (Housing and Urban Development Corporation) and the U.S. Commercial Service.

As for toll, fee or other user-pay/promoter-pay charges, they wanted these imposts fixed in advance and with appropriate inflation indexing and escalation charges. Road and port development needed a separate fund.

In the area of regulatory environment, the meet wanted laws to be enacted at the State and Central levels, which will further facilitate investment and implementation of infrastructure projects, with sanctity of contracts, transparency and accountability as the bottom-line.

There is need to ensure long term continuity of policies and to establish a regulatory mechanism for healthy development and monitoring of projects. The appointment of project management consultant needs to be made mandatory, the meet recommended.

Significantly, the U.S. Consul-General in Chennai, Mr. Bernard J. Alter, who spoke at the meet highlighted the difficulties faced by foreign investors in India, especially in long term funding. Mr. Alter said according to a recent survey of 60 countries, India ranked 58th in terms of infrastructure development. Correcting this deficiency would not be cheap.

Managing private investment in infrastructure development was a complex, politically-charged process. India's uneven record in progress in this area was a reflection of the difficulties governments have had to face in overcoming the hurdles.

Noting that most of U.S. investments in India had been in infrastructure, particularly in the power sector, he said such investments tended to have a long gestation and pay-back periods. Obviously referring to the Enron project, he said, these investments were perhaps more susceptible to political and ideological vagaries of India's ``rather tightly managed economy".

Presenting statistics on how foreign direct investment flow to India had come down in the last two years, he pointed out three areas, which he believed had a lot to do with this growing FDI drought.

First, he said the sanctity of contracts was absolutely critical for attracting investment in infrastructure. The signing of a contract must reflect the end of negotiations and not the beginning.

Failure to adhere to contractual obligations reverberated throughout international financial community. The perception of unacceptable risk went up among lenders each time a contract was abrogated or re-negotiated, raising the cost of funds and thereby hindering the flow of investment. The second key to increased FDI flow was predictability. Lastly, governments should adopt clear procedures for awarding and operating concessions would get a strong, positive investor response.

Unless sanctity of contract, predictability and transparency were ensured, the chances of receiving larger FDI flows were not good at all, Mr. Alter said.

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