By Manish Sinha,
Dun & Bradstreet
31st October 2018

Identifying the Flow of Investments in the Infrastructure Industry

In India, infrastructure investment as a percentage to GDP stands well when compared to other economies whose infrastructure has evolved over a period of time. However, in terms of availability and quality of infrastructure, India stands far behind. In other words, we are spending the ‘right amount’ on infrastructure, but we are not getting an ‘adequate output’. This is the result of many factors, but two specific ones dominate, i.e. high ‘agency’ cost and high corrective maintenance cost of infrastructure. When we compare India with the leading five economies (US, UK, Germany, France and Japan), for every US$ 100 spent on infrastructure by India, US$ 70 goes towards ‘agency’ cost, US$ 12 is spent on corrective maintenance and the remaining US$18 is spent on “constructive investment” i.e. creating new infrastructure and preventive maintenance. For the leading five economies, this stands between US$ 40 and US$ 66. Thus, for the same amount allocated for infrastructure, these five countries on an average are spending three times higher than India.

Therefore, as we look to improving infrastructure in India, we would start with investment efficiency into infrastructure; specifically to reduce agency costs and to ensure that the more efficient preventative maintenance replaces corrective maintenance. Secondly, we should look at where the investment goes. Up to 60% of this constructive investment goes towards creating and maintaining infrastructure to be used within city and related ecosystem in India. The remaining amount goes towards outside city eco system. With rising population and higher migration from rural to urban areas, the cities have to provide an enabling environment to absorb the increasing population and become the growth centers for the economy. In this context, the concept of smart cities becomes relevant. Research suggests that the smart building solutions offer cost saving opportunities of up to 40% in water and energy usage and maintenance costs. Smart city applications reduce fatalities by 10%, cut the average commute by 20%, and lower greenhouse gas emissions by 15%, among other positive outcomes. Closing this efficiency gap can thus, reap large growth dividends. 

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