The Challenges of Commercialization and Risk Profile of Infrastructure

The commercialization of infrastructure projects can format on the basis
that recovery of investments is through a system of user charges. Such
user charges bear a direct relation to the specific benefits that the facility
provides the user.
Large errors have been made in different countries, either over
investment in infrastructure much before the actual appearance of
demand or, conversely, under investment because of failure to anticipate
the demand.
Commercialization would necessitate a demand orientation. The
challenge for policy is on the one hand , to find appropriate market signals
which indicate the future trends of infrastructure demand, and on the
other, to coordinate the supply ins such a manner that investment in these
crucial sectors is made in an efficient manner which ten provides
appropriate returns.

Risk Profile of Infrastructure Projects
The crucial elements in the financing of infrastructure investment is first
assessing the severity of each risk and then identifying the party in the
best position to manage a risk.
1) Development
Risk
The initial very high risk phase where only equity capital can be
used for financing.
2) Construction
Risk
The next high risk phase where cost & time spillovers tend to
distort the future revenue generation & profitability prospects of the
project
The construction phase may be financed by a combination of
equity & debt with guarantees.
3) Operating
Risk
This risk emerges due to underestimation of operating cost &
occasionally, an overestimation of the output from the proposed
infrastructure facility.
Besides the above, there are other risks…..
1) Demand Risk This is a result of an overestimation of the demand &
"Willingness to pay" for the proposed infrastructure facility.
Example _ The toll road network in Mexico
2) Financial Risk Of specific relevance to infrastructure projects are foreign
exchange & interest rate risks.
3) Market Risk This is important when consumers can choose alternative
services such as with toll roads, railways, and even ports.
4) Political Risk Inadequate clarity in Government policies & selection
procedures had made political risk the fulcrum of infrastructure
development.
This is primarily due to the nature of the transaction & negotiation
costs involved, which rarely vary with the size
of the project.
The Operation phase may, in turn be divided as follows.
1) Introductory
Operation Phase
During this phase, the revenue stream is thin & operational
bottlenecks hinder achievement of high capacity utilization.
2) Project
Stabilization Phase
During this phase, the risks reduce considerably & revenues are
more steady and predictable.

The Historical Prominence of the Public Sector
Public lighting is characteristically provided by public authorities & is
generally financed by some form of tax revenues.
Certain long distance highways, which are built for exclusive use by those
who pay for their use.
Power and water supply networks, telecommunications, sanitations and
sewerage, all have elements of monopoly built into them.
Infrastructure provision usually involves high front costs & long payback
periods. Investments are typically bulky & lumpy. This has two
implications. Second, in view of a long payback period, he has to be
capable of obtaining matching long term finance.
o First, the investor has to have a large initial capital.
o Second, in view of a long payback period, he has to be capable of
obtaining matching long term finance.
o Rent regulation came into being with Gladstone’s 1844 Railway Act,
followed by dividend limitations to 10 % for gas & water companies
under the 1847 Gas Works & Water Works Acts. Similarly, limits on
prices or returns were introduced in Canada (Toronto) for town gas
and in some United Sates railroad situates around the middle of the
century.

New Approaches
 Delivery of Infrastructure Systems
The dependence on budgetary allocations has been essentially
responsible for delays in the implementation of projects, due to the
resultant non availability of funds on time.
Insufficient maintenance, misallocated investment, unresponsiveness to
users & technical inefficiencies present issues, which need to be
addressed to improve delivery.
 Stages in Development
The development of infrastructure projects typically involves three distinct
phases…
1. Project identification & planning
2. Detailed design & execution
3. Operation & Maintenance
Projects are identified by various ministries of the Central / State
Governments based on proposals put up by local organizations, which act
as their operational arms.
The detailed design & implementation of projects is carried out by
governmental departments & organizations which work under the
supervision of the concerned ministry.
Examples _ NOIDA, CIDCO, NCRB, and innumerable state level
Organizations.
NOIDA New Okhal Industrial Development Authority
CIDCO City & Industrial Development Corporation Limited
NCRB National Capital Region Board
The operation & maintenance of the projects are usually carried out by the
same organizations that implement the project. Thus the DoT, MTNL and
VSNL provide & maintain the telephone network, while the same
function is discharged in the transport sector by the PWDs and in the
Power sector, primarily by the SEBs.
 Incentive Structure for Efficient Service Delivery
To ensure efficient, responsive delivery of services, incentives need to be
changed through the application of three instruments.
1. Commercial Management
2. Competition
3. Stakeholder involvement
The high willingness to pay for some services provides greater opportunity
for user charges, private sector involvement in management financing or
ownership.
A fundamental feature of competitive markets is that they provide
incentives & disincentives for effective institutional performance.
 The Organizational Framework
To achieve integration in project implementation, it is necessary to create
organizations to implement the projects. Such organizations would fulfill
six objectives.
1. To identify specific projects that could be taken p for commercial
implementation.
2. To seek additionally in resources with respect to implementation of
projects so identified.
3. To ensure project management & implementation along professional
lies.
4. To attract new & appropriate technologies.
5. To seek skills up gradation with respect to project conceptualization,
techniques, costing, maintenance & aesthetics...
6. To promote the implementation of major projects under a self
sustaining format in conjunction with local authorities and
municipalities.