Dr. M.S. Kapadia writes on an RBI Staff Study titled 'Infrastructure
Financing: Global Pattern and the Indian Experience' by Gunjeet Kaur,
L. Lakshmanan, Raj Rajesh and Naveen Kumar which, while vouching
for the PPP model, bats for innovative means to channelise resources
for infrastructure financing.
Globally, significant demand-supply
gaps exist in availability of infrastructure
both in the developed and
developing economies. While in
the developing economies, higher growth
aspirations and burgeoning population
pressures require augmentation of infrastructural
facilities, the developed
economies are grappling with problems of
high cost of reinvestment to replace or
modernise ageing infrastructure.
The private sector has exhibited
increasing interest in infrastructure
investment in India. The relative shares
of public and private investment in total
infrastructure investment during the 11th
Plan are projected to be about 70:30,
against 80:20 in the 10th Plan.
Private sector is anticipated to take up
projects in telecommunications, ports
and airports, where it is envisaged to constitute
more than 60 per cent of total
investment over the Plan period. Forms of
participation include model concession
agreements-regulated PPP projects in
roadways, ports and airports as well as
pure private sector projects that are market-
based such as in telephony and merchant
power stations.
Characteristics of infra finance: Infrastructure
projects differ in significant
ways from manufacturing projects.
Essentially, infrastructure financing has
following characteristics:
- Longer maturity: Infrastructure
finance tends to have maturities
between five years to 40 years. This
reflects both the length of the construction
period and the lifespan of the
underlying asset that is created.
- Large investments: While there could
be several exceptions to this rule, a
meaningful sized infrastructure project
could cost a great deal of money. For
example, a kilometre of road or a
megawatt of power could cost as much
Infrastructure Finance for 11th Plan |
|
Rs. billion |
% to Total |
| Government |
14,366 |
69.9 |
| Budgetary support |
6,447 |
31.4 |
| IEBR of PSUs |
7,919 |
38.5 |
| Internal generation by PSUs |
2,376 |
11.6 |
| Borrowing by PSUs |
5,543 |
27.0 |
| Private sector |
6,196 |
30.1 |
| Internal generations by corporates |
1,859 |
9.0 |
| Borrowing by corporates |
4,337 |
21.1 |
| Total |
20,562 |
100 |
as $1.0 million.
- Higher risk: The risks arise from a variety
of factors including demand uncertainty,
environmental transformations,
technological obsolescence (in some
industries such as telecommunications)
and, very importantly, political
and policy-related uncertainties.
- Fixed and low (but positive) real
returns: The annual returns here are
often near zero in real terms, but real
returns are unlikely to be negative for
extended periods of time (which need
not be the case for manufactured goods).
Sources of funds
Budgetary support was to constitute
about 31 per cent of the Rs.20.56 trillion
infrastructure finance for the 11th Plan.
Of the budgetary resources, large sums
were likely to be directed towards rural
infrastructure and development in the
northeast. Viability gap funding facility
that has totalled Rs.50 billion till early
July in sanctions is meant to reduce the
capital cost of the projects and make
them viable and attractive for private
investors through supplementary
grants. Budgetary provisions for this
facility are made on a year-to-year
basis. State and central public sector
undertakings were projected to contribute Rs 2.38 trillion through internal
generations etc. and Rs. 5.54 trillion in
borrowing.
The private sector would need to fund
almost 70 per cent of its resource
requirement through borrowing; with
the balance 30 per cent coming from
ploughed back profits, depreciation
write offs etc.
Debt/borrowings: The debt component
of the total investment over the
Plan would be around Rs. 9.88 trillion
(48.1 per cent). While central and state
government PSUs would need to borrow Rs. 5.54 trillion, borrowings by private
corporates were projected at Rs. 4.34
trillion. The main sources for raising
the debt would be commercial banks,
non-banking financial companies, pension
and insurance companies, and
external commercial borrowings.
The funding gap for the debt component
was assessed at Rs. 1.62 trillion,
which was proposed to be filled by
enhanced bank credit; relaxation in
norms for raising external commercial
borrowings; and tapping pension,
insurance and other funds to finance
infrastructure projects.
While underlining the case for private
sector participation in infrastructure
investment, the study also makes, among
others, the following points.
- Timely and adequate availability of
credit is a prerequisite for successful
implementation of infrastructure projects.
At the same time, lenders would
have to keep due vigil in order to avoid
asset-liability mismatches on account
of infrastructure funding.
- Whereas there appears to be no shortage
of funds per se in the system, there
is an urgent need to address the issue
of innovations including specialised
institutions like Infrastructure Development
Finance Corporation Ltd and
India Infrastructure Finance Company
Ltd, so that the intermediaries,
instruments and markets can perform
the functions of risk, maturity and
duration transformation to suit the
needs of the investors.
- The flow of private investments,
including in PPP model, into the infrastructure
sector depends on a host of
factors such as investors' interest in
particular segments, bureaucratic efficiency,
evolving market processes,
greater availability of information, size
of the projects, and developers' returns.
The relevant issues like land reforms
need urgent policy consideration and
committed response so that the desired
results can be achieved.