Big fund, big ambitions

One of the biggest roadblocks in the Indian infrastructure sector is the absence of long-term financing from banks due to asset-liability mismatches. In trying to find a solution, the Indian government has proposed setting up a specialist debt fund worth $11 billion, to be launched by the Planning Commission of India.

According to Arvind Singhal, chairman of Indian management consulting firm Technopak Advisors: “India’s funding needs for infrastructure are projected at over $500 billion for the current five-year plan period [2007-2012]. It is impossible for the Indian government to meet such a humongous requirement for funds through its own resources. Hence the objective to raise funds through other mechanisms, of which the infrastructure debt fund could be a good start.”

The proposed fund will provide long-term, low-cost debt for infrastructure projects, which the Indian debt markets are unable to provide at present. It is expected that the cost and tariffs of infrastructure services will go down as a result of the lower-cost, long-term debt provided by the fund.

The fund will help banks by assuming a fairly large volume of the existing infrastructure-related bank debt; in turn releasing an equivalent volume for fresh lending to infrastructure projects. The proposed fund also aims to attract insurance and pension funds as investors – both domestic and international.

Prof. V. Ranganathan, a professor of infrastructure at the Indian Institute of Management in Bangalore says: “Each infrastructure project has currency for about 25 to 35 years.  So, for lenders, the foreign and domestic pension and insurance funds, this is a fairly certain and lucrative cash flow stream for a very long time, corresponding to their long maturities.”

According to a report on the debt fund issued by the Planning Commission of India, it will be set up by a combination of domestic and foreign institutions. The report states that domestic agencies participating in the fund will include the India Infrastructure Finance Company (IIFCL) and State Bank of India as well as international agencies such as the International Finance Corporation and Asian Development Bank.

Strong reactions

The proposal to set up the debt fund has attracted strong reactions from around the country with many viewing the proposal with scepticism since earlier moves to strengthen financing of the infrastructure sector don’t seem to have worked well. Another view is that the Indian government is depending (too?) heavily on private capital in order to meet its infrastructure targets.

“I am against private sector financing of infrastructure, because it goes against the basic tenet of financing infrastructure, where there is market failure due to the ‘public goods’ nature of the projects, which must invite public provision, i.e. government financing,” says Ranganathan.

However, Arvind Mahajan, an executive director at KPMG in Mumbai, says that the onus to raise funds is still primarily on the government rather than private capital. “The contribution from the private sector should not be more than 36 percent. The remaining 64 percent will still come from government sources. It also depends to a great deal on what sector we are talking about. In terms of sectors like telecom and roads, the private sector contribution will be high but for sectors like railways and airports, the share will be lower.”

Critics have also pointed out that, in order to implement the proposed fund, the government will have to ease regulations for foreign entities to invest in it. The venture capital guidelines of the Securities and Exchange Board of India (SEBI), which currently do not allow 100 percent investment in debt, will have to be amended. Also, the Reserve Bank of India (RBI) will need to relax its cap on external loans and exempt long-term flows into the fund.

Observers will be following the progress of the fund with keen interest as India seeks innovative ways of turning its infrastructure dreams into reality.