Infrastructure Spending

Work on the Bandra-Worli sea link project continues. (Pic by Satheesh Nair)

The government's plans to propel infrastructure spending from the current 5 per cent of GDP to 9 per cent by 2011, is hitting a dead-end. An estimated Rs 9,84,500 crore ($203 billion) of debt funds alone is needed to finance that. Where will the money come from?

Indian Banks

Indian banks are relatively small. Only 11 banks had equity above $ 1 billion (Rs 4,900 crore) in March 2007 — of which two were private sector banks. The total equity of the 82 scheduled commercial banks (including 29 foreign banks) was $ 49.8 billion.

Meanwhile, group exposure guidelines of the Reserve Bank of India (RBI) also limits a bank’s exposure to any group, to 50 per cent of its capital funds. This ceiling can be breached very quickly for companies specialising in infrastructure projects. For instance, a group company with two ultra mega power projects (of Rs 20,000 crore each), and a Rs 1,000-crore road project executed through separate special purpose vehicles (SPVs) can require debt funds to the tune of Rs 29,000 crore. So, RBI’s group exposure cap limits developers to their bank’s exposure ceiling.

Insurance and pension funds, also a source of long-term funds, are equally unenthused about lending money for infrastructure spending. Projections show that barely 5-6 per cent of the total debt funds needed for infrastructure come from insurance companies. Secondly Insurance Regulatory and Development Authority’s (IDA) investment guidelines call for project rating of not less than AA. Generally, infrastructure projects that depend on, say, toll collections or airport traffic get a BBB rating. Projects with minimum guaranteed revenue (like an assured offtake in power projects) get a higher rating, a source in the infrastructure sector explained. Therefore, important road or national highway projects would carry only a rating of BBB.

IIFCL and IDFC

IDFC’s managing director Rajiv Lal made a presentation to the government, highlighting serious problems in infrastructure finance, which involve asset-liability mismatches, exposure limitations, and prudential norms. The Infrastructure Development Finance Corporation (IDFC) specialises in infrastructure lending (debt and equity).

In the stimulus package announced on 2 January, the government allowed IIFCL (India Infrastructure Finance Company) to raise Rs 10,000 crore through tax-free bonds for refinancing bank lending of longer maturity to "eligible infrastructure bid-based PPP (public-private partnership) projects". The very fact that IIFCL’s refinance window is for port and road projects is a tacit agreement that bank funds are not available for such projects.

If the amount raised adds up to to Rs 40,000 crore, it will enable infrastructure investments of about Rs 1,00,000 crore (debt and equity together). But this is still a far cry from the Rs 9,84,500 crore of debt funds needed for the infrastructure sector, by 2011-12.

Non-banking finance companies (NBFCs) and external commercial borrowings (ECBs) are other sources of funds for infrastructure projects. But Prime Minister Manmohan Singh told Parliament last year that sources of funds such as ECBs, and also working capital funds, had dried up due to the global credit crunch and slowdown.
Businessworld
Kandula Subramanium