Infrastructure Financing in India Catalysing Growth According to a McKinsey research, the world over infrastructure investment is becoming a priority

y for countries grappling with growth in the economic downturn. India will be one of the largest destinations in the world for infrastructure financing next only to China. However, we have a real risk of under spending which can pull us back very materially as far as the impact of that on GDP and GDP growth is concerned. To achieve this we need a paradigm shift in the way in which we attract funding to the infrastructure sector a way to channel household savings to the infrastructure sector and to look at alternate funding methods like corporate debt markets. From the banking perspective this is a huge opportunity rivaling consumer finance. To do this, banks will need to innovate. Status quo is not an option. The government is sensitive to this and by the end of the 12th five year plan, we are looking at infrastructure spending to be about 11% of the GDP. In the mid term review of the 11 th five year plan, we are roughly on track as far as our spending is concerned we have spent around 10,066 lakh crores out of the total 20 lakh crores. However, the gross budgetary support was much higher than planned. Which means the investment from the private sector was much lower than what was planned. The second fact is that even if we have spent on amount, the actual capacity creation has been short of the targets. Sectors like power, roads, ports, even after the funding has attained closure, capacity creation has fallen behind. This is probably because of cost and time over runs. As a country we need to think through whether we are spending the right amount of money and also whether for we are efficiently spending it are we getting the most bang for the buck. If we look at the next decade or so, emerging markets account for a full 40% of the global infrastructure spend of INR 500 lakh crores. Out of that 40% China will be accounting for 50% of it. Hence China will be spending 20% of the global infrastructure spend. India is going to be 28 or 30% of the 40%. India is going to be roughly 12% of the worlds infrastructure spending. India will spend between 4 to 15 times of what Brazil and Russia will be spending. Hence India is one of the most attractive markets from a growth perspective. However, out of the total budgeted spends, there will be a shortfall of around INR 12 lakh crores. The question is what we can do in the next couple of years to change this. A puzzling fact is that India has the highest household savings in the world, and yet we are talking of an INR 12 lakh crore deficit in infrastructure financing. An explanation of this could be that only 10% of the savings is being channeled into the financial markets. This has not changed in the last seven years. To catalyse infra funding, we need a vibrant debt market, structural reforms in the debt markets like credit enhancements and build specialized units for infrastructure funding. Credit enhancement is crucial in India as the default rating assigned to infrastructure debt is BBB and no investor is going to touch a band with a BBB rating. This is ironic, since the actual default in the underlying asset is close to zero percent. It is one of the safest portfolios seen so far. A good example to follow would be of Malaysia. Of the MLR240 billion they spent on infrastructure in the last 15 years, MLR 150 billion came from the private sector and out of this MLR 108 billion came from bonds.

Infrastructure represents a revenue pool of around 35000 crores. But there are many issues that banks need to overcome. Inabilities to lock in funds, lack of instruments are two. According to Mr. Deosthale, all the projects envisaged may not go through. Hence the shortfall may be actually lower. The government is keen to have the private sector engage in infrastructure. However, there are a number of issues in this. For example, in power sector, coal is an issue, and there is a looming global shortfall. Freight corridor is a non starter. We are under invested in water and we will face shortages here too. There are enormous delays in the award of project (In no case should project delays be acceptable.) right from pre-feasibility study to closure we need to speed up the contracting process. Absence of a regulator is a constraint in dispute resolution. Having good quality bankable projects is very important, if we expect investors to come in. And in the current context a 12 to 13% IRR is not attractive enough. As a consequence the structural, procedural and preparatory aspect before financing comes in has to be looked into. In his view, project delays are unacceptable. They lead to a reduction in the already low IRR. And quite often, infrastructure projects are caught between the center state politics. Mr. Srivatsava held forth, in his individual capacity. He flagged four major issues: 1. Absence of a good project pipeline. 2. Absence of big ticket equity. 3. Paltry returns - according to a world bank study of 214 infrastructure projects in India between 1996 and 2004 returns were between 12 to 14% Compare this with the returns of 14% return in USA. There is no incentive to invest in India. 4. Wide prevalence of corruption. Take out financing has come to mean promoter taking out finance from the project! On a comparative note, China invested at the rate of USD one billion every working day in 2008, while we in India invested USD 25 billion the entire year! Rajan Nair of SBI had a different take on the issue. According to him, there is a pipeline, but narrower. There are problems, but none are insurmountable. SBI has a series of check lists before finance is disbursed. This forces the promoter to arrange for funding from other sources. This could mean a delay, but this is tolerable in a project of such long duration. But we do not have a choice. We have to invest in infrastructure if our dreams of being a developed nation, get the UNSC seat. On the contrary, we will not be able to provide food, education, shelter and hope to our millions. Mr. Rangnekar from Standard Chartered Bank admits that MNC banks are marginal players in the infrastructure play in India. According to him, the bankability of an Indian project, within the context of project finance. Robust contractual structures are absent. A combination if basic infrastructure, close to bankrupt qusai government utilities, and delays make the projects unattractive. The bankability of Indian projects shifts to the robustness of the promoter as opposed to the bankability of the contract. However MNC banks can garner other pools of liquidity from overseas. Given the current scenario, international financing will come only in trickles.

According to Mr. Vishwanathan, banks have a short term liabilities and lending to infrastructure will create asset liability mismatches, which will be a big issue under the Basel II regulations, attracting higher capital for asset-liability mismatches. Banks are the only entity ready to assume project risk. Securitization will help the banks move these assets out of the banks balance sheet. As a banker, the take out financing model in place is not working. In the absence of projects, it appears that we have enough equity. This will not hold good in the future. Takeout financing has been developed to move the assets created out of infrastructure financing out of the banks books on to the IIFCL balance sheet. This will allow the banks to bring down their exposure to infra sector.