Foreign investors have little or no control over regulatory and political events, which can adversely affect the commercial viability of their investments and future business plans in India. These may include political instability leading to delays in decision making, adverse changes or unpredictability on policy issues, bureaucratic inefficiency and corruption, disruption of normal business due to social and political unrest or dilating judicial and dispute resolution processes.
Lacunae such as the lack of independent regulators or even dispute settlement mechanisms in existing legal framework have constrained com- mercialisation of infrastructure. Two highly visible cases of governance failure have been in the electricity and financial sectors, resulting in an adverse climate for reforms. While our legal system and an independent and fair judiciary has for long been one of our hallmarks, systemic delays in judicial process for dispute resolutions have led to some not unexpected results.
Absence of the means of expeditious legal remedies to enforce rights develop where there is no respect for law as the retribution is too late and in the context too little. An efficient justice delivery system can provide powerful impetus to creating an environment of business behavior, which respects legal obligations. Public interest litigation, sequential legal proceedings, injunction orders against implementation of projects, CBI enquiries-lead to a frustrating experience - strong enough to drive away many investors who can use their money and time more productively elsewhere.
Foreign investors view India as a very attractive destination in terms of the huge opportunities that this market (product as well as factor market) offers. But, they will hold back till their key fears are addressed and there is a clear movement towards greater reliance on market mechanisms for resource allocation. The most desirable duty that the government can perform is to put in place policies that reduce risks, increase returns and ensure safety of investments. The government can improve private investors ability to forecast and plan for his investments and thus reduce perceived riskiness of projects by making relevant public information available. By encouraging competition, there can be a reduction in political pressure on governments to intervene in markets. In instances where monopolies may still be unavoidable, the government can reduce risk by establishing laws and regulations that protect property rights and by enforcing them in a fair and consistent manner.
Infrastructure services (power, water, transport, and telecom) are both widely consumed and deemed essential. This increases political sensitivity to the prices charged, as pressure from consumers to keep prices low makes it difficult to cover costs. It is natural to expect broad popular protest when prices rise or services deteriorate. Their facilities may become obvious targets for expressions of other kinds of discontent as well.
Infrastructure projects involve typically large investments that require long gestation periods to bring the projects to revenue stream and thereafter very long payback periods. The sheer time scale introduces risk of uncertainty and exposure to changes in circumstances, laws and policy.
Infrastructure projects are also characterised by high leverage ratios. Financing of these projects is different from the traditional method of financing based on the balance sheet support. These projects are often financed through Special Purpose Vehicles (SPVs) and are structured on a limited/ non-recourse basis. Once investors are committed to projects, they can pull out only by taking a huge loss. Investors and lenders are typically unwilling to make investments without adequate and often complex contractual protection.
While negotiation of such contracts is tedious and costly, enforceability of these contracts although essential, is tough. Investors are faced with the possibility of changing contractual agreements or failure by the government to implement such agreements because of political considerations.
Arbitration and settlement of disputes tend to be very time consuming and add to project cost. Infrastructure projects are highly capital-intensive projects and the costs of delay in resolution of disputes could be extremely high.
The author is managing partner, J. Sagar & Associates