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INTRODUCTION

Infrastructure is the backbone of economic activity in any country, but unfortunately, India

suffers from Osteoporosis. Time and again various policy measures have been taken to

boost infrastructure, but no major progress has taken place barring on telecom

infrastructure front. To fuel Indias ambitious growth rate and meet distant targets, a major

restructuring is required on governance, legal, administrative and financial front. Be it in

power,roads, ports, airports, water, railways, urban facilities or even telecoms, the countrys

infrastructure needs are enormous. There is a massive and urgent need to increase

investment in these sectors.

Finance is one of the most basic requirements for carrying out infrastructure projects, which

are capital intensive and are in risky domains. The low levels of public investment have

made Indias physical infrastructure incompatible with large increases in growth. Any

further growth will be moderate without adequate investment in social, urban and physicalinfrastructure.

In India, escalating infrastructure spending is inevitable. The rapid growth of the economy

has put a lot of strain on infrastructure areas like power, railways, roads, ports, airports,

irrigation and urban/rural water supply. The pattern of inclusive economic growth projected

for the 11th

plan, with GDP growth averaging 9% per year, can be achieved only if this

infrastructure deficit is overcome and adequate investments are in place to support the

growth. What we also need is an improved quality of life for both our urban and rural

populace.

INVESTMENTS IN KEY INFRASTRUCTURE SECTORS

Sector FY 03-07 FY 08-12

Power 48 75

Roads 29 60

Telecom 24 22

Ports 4 10*Figures in $ billion

Source: CRISIL Reseach

CHALLENGES IN INFRA FINANCING

There a lot of hindrances in achieving easy financing for infra projects in India:

Savings not channelizedAlthough Indias saving rate may be as high as 37%, butalmost one-third of savings are in physical assets . Also financial savings are not

properly channelized towards infra due to lack of long term savings in form of

pension and insurance.

Regulated Earnings Earnings from projects like power and toll (annuity) may beregulated leading to limited lucrative options for private sector and difficulty for


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lenders. Also any increase in input cost over the operational life is very difficult to

pass on to customers due to political pressures.

Asset-Liability Mismatch Most of the banks face this issue due to long term natureof infra loans and short term nature of deposits.

Limited Budgetary Resources With widening fiscal deficit and passing of FRBM act,government has limited resources left to meet the gap in infra financing. Rest of

funds have to be met by equity / debt financing from private parties and PSUs.

Underdeveloped Debt Markets - Indian debt market is largely comprised ofGovernment securities, short term and long term bank papers and corporate bonds.

The government securities are the largest market and it has expanded to a great

amount since 1991. However, the policymakers face many challenges in terms of

development of debt markets like

o Effective market mechanismo Robust trading platformo Simple listing norms of corporate bondso Development of market for debt securitization

Risk Concentration In India, many lenders have reached their exposure limits forsector lending and lending to single borrower (15% of capital funds) . This mandates

need for better risk diversification and distribution

Regulatory Constraints There are lot of exposure norms on pension funds,insurance funds and PF funds while investing in infrastructure sector in form of debt

or equity. Their traditional preference is to invest in public sector of government

securities.

OPTIONS FOR INFRASTRUCTURE FINANCING

1. External Financing Provided my multiple agencies for example International Bond

Market. The major advantage of International bond market is long maturities, maturities of10-30 years being typical. Although financing through international bond market can be

more expensive than syndicated loans, the matching of bond tenurewith projects protect

them against ineterst rate fluctuations.

2. Funding from multi lateral institutions Funding from multilateral institutions like the

World Bank and the Asian Development Bank has been limited to public sector

infrastructure projects. But now such institutions have shown willingness to support private

sector participation such as PPP (Public Private Partnership) projects.

3. Debt financing from Banks Borrowing from banks has its own limitations which includesmismatch of duration on asset and liability side. Due to asset-liability mismatches, banks


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tend to have floating interest rates, hence making the project risky. A rate increase of 2-3%

may jeopardise a projects viability.

4. Domestic Debt market Despite high savings rate in India, the corporate debt market has

not yet developed. The underdeveloped nature of the domestic debt market is further

impacted by the crowding out effect of fiscal deficits, which drive up the cost of debt for

non-government borrowers.

5. Funds from Insurance Companies and Pension Funds Such Institutions which have long

term contractual savings could also prove to be an important source of financing

infrastructure. It is natural for these institutions to invest in longer-maturity debts to match

long-term liabilities. However, in India this sector is reluctant to fund PPP or other

competitive bidding process.

6. Infrastructure Finance Company Limited Special purpose vehicle called Infrastructure

Finance Company Limited (IIFCL) set up by government, provides infrastructure funding

through long term debts, refinancing or through any other mode approved by the

government of India. Funding from IIFCL to a project is limited to a maximum of 20% of the

total project cost.

CONCLUSION

Although the steps taken to facilitate the flow of finances to infrastructure has been

encouraging, a more caliberated approach to tailor and fine tune the above schemes is

needed. A robust framework needs to be established to raise funds for the large sector-wise

equity and debt needs and to identify associated obstacles, that need attention.

The necessary action should be taken to iron out the deficiencies and provide an effective

facilitation mechanism in order to maintain the growth momentum of the economy.

infrastructure financing (2)

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