India is among the fastest growing economies in the world and an attractive investment destination driven by a large consumption base. According to CII, the country is expected to attract foreign direct investments (FDI) of US$ 120-160 billion per year by 2025. Over the past 10 years, the country witnessed a 6.8 per cent rise in GDP with FDI increasing to GDP at 1.8 per cent. A significant role to attract foreign investment is played by business facilitation instruments, i.e., investment incentives and investment promotion activities. The first instrument is defined by the effective policies and steps taken by the Government, such as removal of FDI caps in different sectors, government’s push for manufacturing through the production-linked incentive (PLI) scheme etc to increase the inflow of investments in the country. The second instrument, i.e., investment promotion agencies (IPAs) provide necessary information and support to investors throughout various phases of an investment process and promotion of country’s investment opportunities and incentives.
Though the State IPAs have existed for a long time, their true potential has been harnessed in the last five years with implementation of business reforms at the State level to attract and catalyse substantial foreign investment into the country. While these transformations occur, it is important to assess the performance of these State IPAs. Invest India had recently undertaken an assessment to measure the preparedness of the Indian State IPAs to attract and facilitate investment projects across eight pillars including mandate and organization, strategy and marketing, targeting investors, winning Investment projects, facilitating investments, aftercare, systems and infrastructure and website.
This is a welcome step in the transformation of State IPAs. However, given that the IPAs are above a threshold and increasing competition among countries to attract and retain FDI is changing the way international business is conducted, it is an opportune time to add ‘achieving self-sustenance’ as the ninth pillar in assessment index. As per a survey conducted by ‘World Association of Investment Promotion Agency,’ most IPAs are financed through Governments’ public funds (89 per cent). Several agencies managed to supplement their budgets by providing various services to clients (11 per cent), contribution from private sector (11 per cent), and financial aid from international organizations (7 per cent).
A new metric to measure success
Invariably, IPAs have existed on Government grants. But, as every organisation goes through a lifecycle, it is important to assess the sustainability and performance of the organisation, it is the right time for the State IPAs to take the litmus test on the quality-of-service delivery and envisage a transformation towards self-sustenance.
IPAs with business-like structures are more successful in bringing investors to a location. Therefore, IPAs can develop their own vision for growth and revenue model by levying a nominal facilitation fee in lieu of providing better facilities to the investor. Linking facilitation fee with outcome oriented KPIs such as delivering services hassle free and, in a time bound manner will have a strong correlation and would encourage quality of service delivery. Further, the fee slabs can vary with Industry size and MSMEs may be asked to pay slightly lesser amount.
Secondly, IPAs play an integral role in positioning State as an important investment destination and enable the marketability of industrial plots developed by State IDCs. Therefore, IPA can rightfully charge a professional transaction fee of 1-2 per cent from Industrial Development Corporations (IDCs) for facilitating plot sales.
Delivering investor satisfaction
The 2019 Global Investment Competitiveness (GIC) Survey revealed that investors consider advocacy to be the most critically important service IPAs provide. Thus, as the third revenue model, IPAs can charge a nominal business fee from investors for providing business advisory services on investment generation (development of strategies to induce investors commitment to an investment project through seminars and conferences), policy advocacy (location assessment, incentive structuring) etc.
The 2019 GIC Survey, reveals investors value IPA services: 90 per cent of responding investors value at least one IPA service, and two-thirds or more appreciate IPA services across various stages of the investment life cycle, not just at attraction or entry.
Thus, IPAs need to follow a proactive approach at improving their service delivery across the investment lifecycle to increase investor satisfaction, which will have a ripple effect on increasing revenue and self-sustenance of these agencies. It is the right time for the agencies to lay a roadmap for the next 3-4 years to achieve 100 per cent self-sustenance which needs to be done in a phased manner and it is recommended to start by developing a model wherein initially the agency works on 50 per cent grants and 50 per cent on generation of its own revenue.
It is pertinent to understand that the objective is not to focus on revenue augmentation for the IPAs, but to use revenue augmentation as a lever to improve the service delivery standards and deliver a superior quality experience for the investors.
The author is co-founder and managing director, Primus Partners