The World Bank has approved a $350 million loan to encourage private sector involvement in a major roads project in Karnataka, a state in Southwest India.
The International Bank for Reconstruction and Development will provide the loan, which has a 5-year grace period and a maturity of 18 years, according to a statement from the World Bank.
The loan's approval comes just as private equity firms are showing increased interest in the country's road sector. Private equity firm 3i has just agreed to invest about $111 million in Indian road operator KMC Infratech while Morgan Stanley Infrastructure Partners is reportedly seeking to take a $200 million equity stake in the Indian arm of Spanish construction company Isolux Corsan, which builds roads in North India.
The loan also comes on the heels of a regulatory change aimed at encouraging more private sector financing of Karnataka's roads. In July 2010, the state government passed a policy allowing private concessionaries to toll state highways, a move aimed at breaking away from the typical structure of funding the improvements out of current state government taxes and revenues.
Building and upgrading the state’s core road network “requires a transition from traditional ‘pay-as-you-go’ financing” from government funds to “ring-fencing of road user charges that can be used for long-term road development through [public-private partnerships] and borrowing from financial institutions,” Binyam Reja, senior urban transport specialist at the World Bank, said in a statement.
The government of Karnataka had originally requested a $1.6 billion loan to develop 3,400 kilometres of roads. But the World Bank was not able to provide that amount given “the competing priorities in the Bank’s Country Program for India”, according to a project document. Instead, the government plans to use the loan to attract $500 million in private sector financing.
Last November, the Asian Development Bank also agreed to lend $315 million to support the expansion and upgrading of 600 kilometres of Karnataka’s roads.