Generic Issues for Sustainable Infrastructure Financing—Sanctity of Contracts and Autonomous Regulation of Infrastructure

Abstract

Abstract Infrastructure projects require huge investments, which are in the nature of sunk costs, with returns that are spread over decades. As such, the sanctity of contracts needs to be upheld as the private sector typically uses these contracts to model their returns and submit bids accordingly. This chapter looks at one case study (the Hyderabad Metro Rail Project) to illustrate the point about upholding sanctity of contracts for sustainable financing of infrastructure projects. Because of the characteristics of infrastructure, autonomous tariff regulation is also very important for sustainable financing of infrastructure projects. If there is regulatory capture, either by the public or the private sector, the returns to infrastructure projects are affected, including the regulatory risk and its impact on the cost of capital. In this context, the chapter examines infrastructure regulation in India to evaluate whether some of the decisions taken by infrastructure regulators are increasing regulatory risk. This discussion leads to a case for other regulatory options like ‘regulation by contract’ and multi-sectoral regulators, rather than creating an independent sectoral regulator for each sector opened up for private participation.