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The Funding challenge.

Byline: Infrastructure Today


Infrastructure Finance

The Funding challenge

Meeting the $500 billion requirement for India's development could well be more difficult than expected despite the measures.

The Eleventh Five Year Plan envisages an infrastructure investment of Rs 20,56,150 crore (at 2006-07 prices), equaling $ 514 billion, to be shared between the Centre, states and private sector in the ratio of 37.2, 32.6 and 30.1 per cent.

Debt financing

The total required debt financing has been estimated at Rs 9,88,035 crore. The gap between the likely availability of debt resources and the estimated debt requirement is sought to be bridged through enhanced credit, ECBs, pension and insurance funds and other debt funds on commercially viable terms. The actual flow of debt resources to infrastructure needs to be evaluated against the requirment indicated above. However, this is rendered difficult on account of insufficient information.

Net bank credit to infrastructure in any year is defined as the difference between March end amounts of outstanding gross deployment of bank credit to infrastructure. Setting the flow of credit during 2007-08 and 2008-09 against the estimated requirement, it seems that the flow of bank credit may bridge a portion of the gap between the likely debt resources and the estimated debt requirement.

In the stock of infrastructure investment made by insurance companies by 2007-08 end (Rs 93,924.2 crore), the public sector companies had a share of 94.3 per cent. With increasing infrastructure investment of insurance companies, their share increased from 2.5 per cent in 2004-05 to 5.7 per cent in 2007-08. In 2006-07, the public sector insurance companies made a significant step up in their infrastructure investment, but could not sustain the pace in 2007-08.

Flow of resources to infrastructure through external commercial borrowings had quadrupled from 2005-06 to 2007-08, but then came down drastically during 2008-09. Major ECB receiving sectors, air transport and telecom,

witnessed slowdown in ECB flows during 2008-09. While the ECB flow to the infrastructure sectors in the first three quarters of 2008-09 remained less than the corresponding periods in 2007-08, ECB flows to infrastructure in the fourth quarter of 2008-09 were higher than those of 2007-08. The spike in 2007-08 was largely due to the increased flow of ECBs to air transport, which may not be fully treated as infrastructure.

Infrastructure sectors have started raising significant amounts through private placement of debt. (While private placement has equity and debt components, the sector-specific information on equity components is not available). It may be seen that power and transport sectors raised substantially higher resources during 2008-09 through private placement of their debt, compared to the previous years.

Equity financing of infrastructure

Out of the total private sector infrastructure investment of Rs 6,19,591 crore projected during the Eleventh Five Year Plan, Rs 1,85,877 crore (30 per cent) is expected from internal accruals/equity financing, with Rs 23,450 crore and 28,276 crore expected to realise in 2007-08 and 2008-09 respectively. The total capital raised through public and rights issues (altogether) had increased from Rs 33,508 crore in 2006-07 to Rs 87,029 crore in 2007-08 and then declined to Rs 14,720 crore in 2008-09. Corresponding to this, there has been a steep decline in the capital raised through public and rights issues by infrastructure sectors. The inflow of foreign direct investment to the infrastructure sector increased by more than five times in 2007-08. The pace of FDI inflows to infrastructure sectors was kept up during 2008-09.

Infrastructure development and public private partnerships

About a third of the Planning Commission's estimate of Rs 20,01,776 crore (at 2006-07 prices) required for infrastructure development during the Eleventh Five Year Plan is expected to be met through private investment and public-private partnerships (PPPs). Besides supplementing limited public sector resources, PPPs bring in private sector expertise, cost reducing technologies and efficiencies in operation and maintenance. While encouraging PPPs, six constraints have been identified:

Ao Policy and regulatory gaps, specially relating to specific sector policies and regulations; Inadequate availability of long-term finance (10 year plus tenor)-both equity and debt;

Ao Inadequate capacity in public institutions and public officials to manage PPP processes;

Ao Inadequate capacity in the private sector - both in the form of developer/investor and technical manpower;

Ao Inadequate shelf of bankable infrastructure projects that can be bid out to the private sector.

Ao Inadequate advocacy to create greater acceptance of PPPs by the stakeholders.

To address these constraints, several initiatives have been taken by Government of India to create an enabling framework for PPPs. Progressively, more sectors have been opened to private and foreign investment, levy of user charges is being promoted, regulatory institutions are being set up and strengthened and fiscal incentives are given to infrastructure projects. Approval mechanism for PPPs in the central sector has been streamlined through setting up of Public Private Partnership Appraisal Committee (PPPAC). Standardised bidding and contractual documents have been notified.

To address the financing needs of these projects, various steps have been taken such as setting up of the India Infrastructure Finance Company Limited (IIFCL) to provide long tenor debt to commercially viable infrastructure projects; and launching of a scheme for financial support to PPPs in Infrastructure to provide viability gap funding (VGF) to PPP projects. IIFC (UK) Ltd, a wholly-owned subsidiary of IIFCL at London - operates with the objective of borrowing funds from the Reserve Bank of India (RBI) and lending to Indian companies implementing infrastructure projects in India solely for meeting capital expenditure outside India. RBI would be providing up to $ 5 billion to IIFC (UK) Ltd by subscription of 10-year maturity USD denominated bonds, in several tranches, of the subsidiary. Multilateral agencies such as the Asian Development Bank have been permitted to raise rupee bonds and carry out currency swaps to provide long-term debt to PPP projects. Setting up of dedicated infrastructure funds are also being encouraged to increase the flow of equity investments.

For building the capacity of public institutions in preparing a pipeline of credible, bankable projects that can be offered to the private sector, state governments and central ministries are being provided with technical assistance in the form of inhouse PPP, MIS experts and access to a panel of legal firms. Other measures include assistance to state governments and central ministries in hiring consultants through a panel of transaction advisers and preparation of sector-specific toolkits for engaging in PPPs.

For providing financial support for project development activities to the states and the central ministries, the scheme and guidelines for India Infrastructure Project Development Fund (IIPDF) have been notified. The IIPDF ordinarily assists up to 75 per cent of the project development expenses in the form of interest free loan. On completion of bidding, the project development expenditure is expected to be recovered from the successful bidder. PPP projects in urban and social sector have been identified as pilots, which are being structured in collaboration with the implementing authorities. The objective is to develop sustainable demonstration projects that may eventually have a catalytic effect on PPPs in these sectors.

In the wake of the global financial crisis, the Government of India has initiated a series of measures to sustain the impetus in investments in infrastructure. Foreign borrowing rules have been eased by removing "all-in-cost' ceilings on such borrowings, expanding the definition of infrastructure sector for availing external commercial borrowings (ECBs), allowing corporates engaged in the development of integrated townships to avail ECBs under the approval route and raising foreign investment limit in corporate bonds to $ 15 billion. NBFCs, dealing exclusively with infrastructure financing, would be permitted to access ECB from multilateral or bilateral financial institutions, under the approval route of RBI.

The India Infrastructure Finance Company Limited (IIFCL) has been authorised to raise Rs 10,000 crore through tax free bonds to provide refinance to banks for their loans in the road and port sector for which bids have been submitted on or after 31st Jan 2009. The refinance from IIFCL would supplement the resources available with banks to finance such infrastructure projects involving projects worth Rs 25,000 crore. To fund additional projects of about Rs 75,000 crore during the next 18 months, IIFCL is being enabled to raise Rs 30,000 crore by way of tax-free bonds in several tranches, once the funds raised during 2008-09 have been effectively utilised.

Time and cost overruns

The progress of the Central sector projects, each costing Rs 100 crore and above, is being monitored by the Department of Programme Implementation on a monthly basis. In March 2009, the projects in the roads, power, railways, petroleum, telecom, coal and steel sectors constituted more than 94 per cent of the total number of monitored projects. The cost overrun is calculated on the basis of the subsequent revisions, till the reporting month, to the original cost of sanction. Over time, there has been no visible positive change in the timeliness of completion of projects; nor in the avoidance of cost overruns.

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Publication:Infrastructure Today
Date:Jul 1, 2009
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