The OECD estimates that global annual infrastructure requirements for the period ending 2030 for electricity (transmission and distribution), road and rail transport, telecommunication, and water would be around an astounding 3.5% of world GDP?over $50 trillion. The Planning Commission now estimates a requirement of $1 trillion as infrastructure investment for the 12th Plan. In the budget for 2011-12, the finance minister announced a slew of measures to deepen the money market for infrastructure projects. The inevitability of sourcing funds from outside the public sector is, therefore, reinforced and the need for long-term debt that suits infrastructure has also increased.

Bonds, though priced higher than syndicated loans, are considered the optimal source of infrastructure finance as their tenors can range over even thirty years. The need for a thriving corporate bond market to boost infrastructure financing in India is frequently voiced and has been recommended over the years by various expert groups including the committees on infrastructure financing and financial sector assessment. A monetary policy expert, however, had questioned the premise, pointing out that nowhere in the world has infrastructure development seen large-scale private financing.

Developed countries, which saw massive infrastructure investment in the first half of the 20th century, today seek investment basically to renew greying infrastructure. Simultaneously, most emerging market countries are now seeking investment in large new projects. The resultant competition for funding has been complicated as the traditional costs attached to emerging market projects, perceived as riskier as they are greenfield and in ?newer? markets, is countered by the perception that the developed economies are debt-stressed and the growth engines are in the emerging markets. Countries that have gone in for public private partnerships (PPP) with long-term concessions have opted for different approaches.

Analysis reflects distinct patterns in large-scale global infrastructure financing, with the relatively small share of bond finance due to limited access to the international bond markets. It also shows that if India has to sustain or increase its growth rate, there may be a need to explore the approaches taken by other countries to boost mobilisation of infrastructure investment and create its own hybrid.

Australia, which has well-established institutional PPP mechanisms, has encouraged private infrastructure financing over the last decade. In the early 1990s, tax breaks for private infrastructure investment through bond issues were introduced (thereafter, the replacement scheme lowered support for urban road projects which capped foregone revenues). Over the years, seminal expertise in mobilising private finance for infrastructure came from the banks through advisory services?banks also accessed the bond markets themselves to raise debt.

The US has, historically, relied on government infrastructure spending?debt financed the westward expansion primarily through government bonds, boosted by the 1913 federal income tax law exempting interest income from municipal bonds. It was believed that bond issuance effectively lowers the cost of infrastructure as, by helping finance long-term infrastructure projects, bonds help contain dips in government cash flow. In turn, savings are passed on to taxpayers who help the government pay for the needed services. State and local government municipal bonds, other than the recent ?stimulus bonds?, have financed the provision and rehabilitation of public infrastructure facilities, with a daily trade of $22 billion, primarily due to their tax-free status. They are generally either general obligation projects (of benefit to the community so repaid from tax revenues) or revenue bonds (utilities of benefit to only their users, inherently riskier unless they are for essential services that have an assured user-base). On the private side, the US corporate bond market sees daily trading volumes of over $15 billion. After the recent banking crisis, even entities that had earlier relied on a combination of bank lending and the public debt market have increasingly turned to the latter.

While private financing of infrastructure has been present over the years, post-war Europe mostly had state-owned infrastructure and significant privatisation came in from the 1980s when public finances came under strain. In France, which went in for PPPs about half a decade ago, there is acknowledgment that banks are unsuited for sourcing long-term infrastructure debt and lack the ability to price the lifecycle costs that are inherent to PPPs. France is now opting for a state-backed securitisation fund that will use the capital markets to re-finance debt after the construction phase?the availability payments will directly service the lender. As this is virtually sovereign paper, it is AAA-rated.

Chile is an interesting case. Its PPP concession scheme was developed in the 1990s. The corporate bond market began to develop only in the late 1990s, and has grown from 3% of GDP to around 15% today. Growth has been driven by pension funds and insurance agencies. Chile found that there is a preference for inflation-indexed bonds that make long-term infrastructure bonds attractive. About three quarters of the bonds are rated AAA or AA, as, increasingly, bond-issuance is by the private construction industry participating in PPPs with state-guaranteed cash flows, with estimates that the average asset-size of bond-issuing companies was twice that of non-issuing companies. Transportation, construction and utilities, the three largest issuing industries, have seen long maturities, sometimes longer than 20 years.

In countries like South Africa and Malaysia, too, new corporate bond issuers from the infrastructure sectors seem to be coming to the market and, in a few countries, the outstanding share of corporate bonds issued to finance infrastructure was over 50%, albeit small overall. Eventually, the shift from bank-debt for infrastructure finance has to happen. In India, we have already tried the issue of sub-sovereign bonds (municipal bonds for water supply and sewerage infrastructure). While long-term prerequisites like low stable inflation and the convergence of real and nominal interest rates have to be addressed, other requirements are the re-assessment of the exposure limits for insurance and pension funds to infrastructure and also an option that was recommended by multilateral development banks?project bonds, i.e., corporate bonds backed by the assets of the project, not across the assets of the sponsor, perhaps initially for annuity-based projects, which would attract favourable risk-ratings. The department of economic affairs proposal to rate the risks of PPP projects could be re-visited for this.

The writer works in the government. Views are personal