Over the last year, India has witnessed a considerable slowing of the economic growth rate due to tight money policy, changes in government, lacklustre capital markets and by far the most important of all - growth in infrastructure lagging behind economic growth.Progress, the benefit of liberalisation, though extended to infrastructure has been uneven in various segments. Indian industry continues to face power shortages pay the highest tariff for telecom, pay frightfully high freight costs for transferring goods to ports, the ports themselves being "choking" points rather than gateways, while real estate continues to be among the most expensive in comparison to other countries.
Lack of adequate finance due to underdeveloped capital and debt markets, has starved infrastructure development. Besides, high interest rates of 17 per cent to 21 per cent on rupee debt and dollar debt, respectively, incurring heavy charges on country premium, forex cover and rupee depreciation are an onerous burden. A majorissue in financing infrastructure is of domestic versus foreign funding.
Currently, lack of long-term hedging products has limited foreign financing thus, making for heavy dependence on the domestic sector. The domestic markets are also unable to fill the void, because not only do they lack depth, but are also limited by tenors. There is also a need for channelising pension and life insurance funds (good source of long-term financing) for investment in this sector. NRI investment could also prove to be an important and large source of finance for infrastructure projects through initiatives such as the recent Resurgent India Bonds by the State Bank of India.
Long gestation periods with returns accruing only after the initial few years, have necessitated considerable financial innovation in infrastructure financing. Resource constraints of governments have emphasised the need for private participation.
This has led to government initiatives to encourage private participation such as IDFC at the nationallevel and Infrastructure Initiative Funds in some states which rather than providing additional funds, provide support by way of credit-enhancement facilities -- guarantees, backstops, liquidity support, etc. An example of private enterprise and government working in conjunction is the current ongoing expansion of the Visakhapatnam Port and the proposed elevated rail system in Bangalore (to be jointly promoted by the UB Group Consortium and the Karnataka government).
Increasing awareness of the need for encouraging private participation in this sector with the government acting as a facilitator (by providing venture capital, guarantees, conducive regulatory environment, tariff reforms, measures for developing capital markets, etc) in the last three-four years, has resulted in financial institutions (FIs) and banks becoming active - the FIs more so than the banks which are constrained by asset-liability mismatches. Most banks however, follow the institutions - FIs do the due diligence and banks simply addthe pot of money.
Active players in infrastructure funding are Infrastructure Leasing and Financial Services Ltd, ICICI Ltd, Industrial Development Bank of India, Industrial Finance Corporation of India, Small Industries Development Bank of India and more recently, (1997-98) the Infrastructure Development Finance Co Ltd (IDFC) and the Urban Infrastructure Development Fund.
While financing of power and telecom projects has received greater attention and seen some positive initiatives, financing of roads and ports is yet to take off since banks and FIs are vary of the grey areas as regards rate of returns.
Product variations for financing infrastructure are few since the concept is in a very nascent stage in India. The following are some commonly used financing practices :
(a) Long-term loans:
These are most common, most often with interest reset options to afford protection to investors in case of unfavourable interest rate movements. Such loans can be "back-ended" ie, allowing the project tobecome viable and start accruing cash, while principal repayments are structured to commence in the last few years of the project.(b) Take-out finance:
The brainchild of IDFC, this allows participation of non-traditional players such as banks while at the same time stretching the maturity of the finance. Thus, commercial banks provide finance for the initial five years of the project and IDFC takes over from the fifth year till maturity. Also, since the rate of return on infrastructure projects is exposed to various risks of financing, inflation, currency, etc, schemes such as take-out financing would prove beneficial in such cases.(c) External commercial borrowings/Equity offerings:
These constitute long-term foreign currency loans GDR/ADR offerings arranged by a syndicate of Indian and foreign banks.(d) ECA-guaranteed loans:
Foreign currency loans mentioned in (c) above could be backed by guarantees. Many power projects have availed of loans out of lines of credit form export creditagencies of US, Japan, etc. with such lines of credit/loans are in turn guaranteed by Indian financial institutions.(e) Debt markets:
The introduction of tax benefits under Section 10(23) (G) of the Indian Income Tax Act, has made it conducive to companies seeking infrastructure finance to approach debt markets in order to avail of the tax benefits. However, this method has not been widely used (in the past, Reliance Telecom has availed of this financing method and more recently, the Mumbai-Pune expressway is proposed to be financed by this method).
Such issues are normally guaranteed by IDFC and subscribed by commercial banks. In this context, a special mention should be made of the state of Andhra Pradesh which has been particularly innovative in financing infrastructure. In association with ICICI, bonds have been issued providing options to investors for investing their savings in financing various units in the state.
The above are some steps in the right direction. However, some bottlenecksare bound to arise since the entire concept of infrastructure financing and private participation in infrastructure development is in the very nascent stages. It is thus imperative that a concerted effort be made by all concerned, the government-the regulatory authority and policy-makers, private enterprise, existing and potential investors, financing agencies, etc, in order to ensure that the right impetus is provided to infrastructural development so as boost economic growth.
The author is ING Barings CEO
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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