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Infrastructure-financing will spur economic growth

Pradeep Saxena

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: