Financing Road Projects in India
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Financing Road Projects in India
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UNESCAP Inter-regional Expert Group Meeting on Public Private Partnerships in Infrastructure Development 1 Domestic Financing and Special Financial Institutions for PPP Projects Cherian Thomas, Senior Director Infrastructure Development Finance Company Limited 2 (IDFC) New Delhi, India Background Infrastructure projects are typically capital-intensive and have long gestation periods, and so require significantly high levels of long-term financing. With the exception perhaps of airports and ports, which have an international side to their operations (and power projects set up for cross border sales of the power generated), the earnings of most infrastructure projects (energy, telecommunication, roads, railways, urban transportation, water supply, sanitation and other urban infrastructure) are denominated entirely in their respective local currencies. Since projects of this nature have very little natural hedge, their ability to absorb cross-border financing in significant volumes is rather limited, more so, given the lack of standard long term foreign exchange risk hedging products (usually not over 2 years) and little market depth for long-term swaps in most developing countries. Availability of domestic financing of the required magnitude is therefore critical to the development of infrastructure in any location. Since capital markets across developing countries are at different stages of development, the ability to implement projects either as pure private investments or under public private partnership (PPP) structures 3 also depends on the domestic finance market in each of these locations. Where markets are reasonably developed, domestic financing by way of equity and debt, and to a lesser extent mezzanine finance structures, become common sources of funding for infrastructure projects. Other locations would still need to access multi-lateral or bilateral credit sources (including export lines of credit) for funding infrastructure projects, with the exchange risk absorbed by the government, and so project
1 From February 17-19,2009 at the United Nations Conference Centre, Bangkok, Thailand 2 The views expressed in this paper are the author’s own and do not necessarily represent the views of IDFC. 3 Both categories of projects private infrastructure(where the government has no responsibility for the delivery of services or where the activity can be freely engaged in by the private sector) and PPP projects (where the government continues to assume ultimate responsibility for the service delivery, but does so through a private intermediary) have been referred to as private infrastructure or private infrastructure projects since they broadly require the same types and characteristics of financing
implementation is usually undertaken by government authorities directly or through specialised government agencies, although in most instances, not very effectively. Availability of domestic finance, of course, is not the only pre-requisite for development of private infrastructure, though it is certainly a very important one. Other pre-requisites for the development of a private infrastructure market include putting in place appropriate legal and policy frameworks, comprehensive project preparation, transparent procurement processes, equitable concession/ contractual structures, entrepreneurial resources of the required order and perhaps most importantly, political will in appropriate measure. This paper broadly reviews the experience of India over the last decade in the development and financing of private infrastructure projects and the role of a specialised institution, namely, Infrastructure Development Finance Company Limited (IDFC) in policy advocacy, development and financing of private infrastructure projects during this period. Admittedly the developments over the last year which have caused a serious meltdown in global financial markets have altered the financial landscape for private investment in infrastructure in India. The response so far to these challenges and a possible way ahead to meet the challenges of developing critical infrastructure in a fund-starved environment, have been briefly set out at the end of the note. Development of Private Infrastructure in India Till the nineties, investment in infrastructure was almost exclusively in the public domain, made by government departments, specialised government agencies (SGAs) and public sector undertakings (PSUs). These investments were financed by budgetary allocations, surpluses of SGAs/ PSUs, market borrowings (mainly from the bank market), borrowings from multi-lateral agencies and a few capital market bond issuances. The nineties also saw the pursuit of policies of economic liberalisation 4 such as de-licensing of industry, increased market access by reduction in customs duties, freeing of the exchange rate on the current account and enhancement of the limits for foreign direct investment, resulting in an increased alignment of the Indian economy to global markets. Investment in infrastructure, however, continued to be low at levels ranging, over the years, between 3-6% of the gross domestic product (GDP), well below the investment levels of comparable economies like China and other East Asian economies, given the overall inadequacy of public resources. Given this backdrop, it was inevitable that the government looked at increasing the levels of infrastructure investment through private investment. To begin with, in 1991, a national power policy was announced which opened up power generation to the private sector and provided various financial and fiscal benefits to investors. This was followed by the national telecom policy in 1994, guidelines for private sector participation in major ports in 1996 and a new civil aviation policy, all encouraging private investment in these sectors. 4 In the aftermath of the Gulf war of 1990 and the severe economic crisis that followed due to a very adverse balance of payments situation, India received a structural adjustment loan from the International Monetary Fund which prescribed conditions of economic liberalisation
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