International Conference on

Infrastructure Finance
Development

Dr. B. Koteswara Rao

Naik
NITIE Mumbai

Indias Infrastructure
Indias constraints in infrastructure are obvious to first-time
visitors or long-term residents. The problems of clogged
airports, poor roads, inadequate power, delays in ports
have been well-recognized as impeding growth.
Indian companies on average lose 30 days in obtaining an
electricity connection, 15 days in clearing exports through
customs, and lose 7% of the value of their sales due to
power outages
Incremental demand for infrastructure will continue to
increase due to economic growth and urbanisation. Thus,
there is both a stock and a flow problem. If Indias
economic growth were to continue as we envisage, it will
fuel demand for energy, transport, logistics and

Indias Infrastructure
Additionally, India is in a phase
of
increasing
urbanization.
Currently, only 30% of India is
urbanized. We estimate that this
may increase to just above 60%
by 2050, thus leading to an
additional 700mn people living in
cities.
The impact on infrastructure
demand will be enormous, from
demand for inner-city transport,
water and sewerage to lowincome housing. The Planning

The problem
Financing: The Planning Commission estimates that India
needs an additional $500bn over the next five years itself to
finance infrastructure10. A large percentage of that will
have to come from the government. However, government
finances are not in good shape, which does not augur well
for increasing investment rates dramatically.
Institutional constraints: There are capacity constraints
in managing and executing infrastructure, especially at the
state level. At the state level, there is very little capacity for
ownership and stewardship of infrastructure development in
the municipal bodies. There is also a shortage of skilled

The problem
Regulatory issues: Till very recently, the government
dominated the infrastructure space, and private investment
was negligible. Still, there are significant areas of
infrastructure that are not open to private investment. User
charges on water, road and power are not yet
commensurate with marginal costs, as they are politically
sensitive, thus impeding private investment. There are
significant barriers to entry for firms, especially foreign
firms, and FDI limits are still in place. Further, there are
frequent changes in regulatory policy in all areas of
infrastructure, including telecom, roads and power, which
increase uncertainty and impede private investment.

Bridging Indias infrastructure

gap
If theres one thing holding back Indias economic growth, its

the countrys massive infrastructure deficit.

The lack of good roads, bridges and ports cant be blamed
entirely on red tape, which often leaves major projects stalled
for years.
Financing is an equally critical roadblock one that the
government would be wise to tackle when it lays out its first
full-year budget on 28 February.

Bridging Indias infrastructure

gap

In theory, private companies would complete

projects faster and more efficiently than the state
would, as long as they were insulated against the
initial risk.
The good news is that unlike its predecessors, the
current regime has some fiscal room to increase
public
investment
in
infrastructure.
Modis
government has stuck studiously to its fiscal deficit
targets and desisted from wasteful spending
schemes.
The fact is that there are only two sustainable ways

Bridging Indias infrastructure

gap
The bond market is by far the best place to

raise
long-term finance. Yet its very underdeveloped in
India, largely because it is dominated by the
government, which has traditionally used it to raise
cheap finance for its own profligate spending.
The first step to building a truly vibrant bond market
is fiscal responsibility.
For depth, bond markets require investors, both
domestic and foreign. Those investors need to be
able to hedge their risks credit risk, interest- rate
risk and currency risk in appropriate derivatives

Bridging Indias infrastructure

gap
Developing a true bond market will take time,

of
course. So in the short run, the government also
needs
to
encourage
non-banking
financial
institutions to step in with financing.
A number of such bodies already exist, from the
India Infrastructure Finance Company to the
Infrastructure Leasing and Finance Company and the
Infrastructure Development Finance Company.
But they lack scale and are dependent on Indias
narrow bond markets to raise money.

Bridging Indias infrastructure

gap
One radical idea thats been floated would

be to
create a sovereign wealth fund using the shares of
public-sector companies, rather than foreign
exchange as with other similar funds around the
world.
That would give such a fund $200 billion to work
with immediately, a number that could be quickly
scaled up to $1 trillion by diluting equity and by
raising debt funds from markets.
Theres no other realistic way to meet the countrys
infrastructure needs within a reasonably quick time

Elements of reform
To help resolve financing issues, India needs
to develop its capital markets.
Critical to the availability of finance is the need for a
vibrant and liquid corporate bond market. Financial
sector reforms such as deregulation of pension and
insurance markets, and especially allowing more
foreign participation in the banking sector, will be
important in this regard. India can avail of publicprivate partnerships, and financing models such as
viability gap funding, and use its foreign reserves as
an SWF, to buttress the availability of capital for

Elements of reform
To
encourage
greater
private-sector
participation, the regulatory constraints need
to be removed.
It has become increasingly evident that the
government, by itself, will not be able to build the
infrastructure. It has therefore moved to models of
public-private partnerships. These have yielded some
successes in areas such as road-building and ports,
apart from the big success story of telecom. We think
India needs to encourage more private sector
participation in building infrastructure. In all, 35 new

Elements of reform
To
encourage
greater
private-sector
participation, the regulatory constraints need
to be removed.
It has become increasingly evident that the
government, by itself, will not be able to build the
infrastructure. It has therefore moved to models of
public-private partnerships. These have yielded some
successes in areas such as road-building and ports,
apart from the big success story of telecom. We think
India needs to encourage more private sector
participation in building infrastructure. In all, 35 new

Public-Private Partnership in
Indian Infrastructure
Development: Issues and Options
Schemes and Modalities of PPP
Schemes
Modalities
Build-own-operate (BOO)
The private sector designs, builds, owns, develops, operates
Build-develop-operate (BDO)
and manages an asset with no obligation to transfer ownership
Design-construct-manage-finance
to the government. These are variants of design-build-finance(DCMF)
operate (DBFO) schemes.
Buy-build-operate (BBO)
Lease-develop-operate (LDO)
Wrap-around addition (WAA)

The private sector buys or leases an existing asset from the

Government, renovates, modernises, and/ or expands it, and
then operates the asset, again with no obligation to transfer
ownership back to the Government.

Build-operate-transfer (BOT)
The private sector designs and builds an asset, operates it,
Build-own-operate-transfer (BOOT) Build- and then transfers it to the Government when the operating
rent-own-transfer (BROT)
contract ends, or at some other pre-specified time. The private
Build-lease-operate-transfer (BLOT)
partner may subsequently rent or lease the asset from the
Build-transfer-operate (BTO)
Government.
Source: Public Private Partnership, Fiscal Affairs Department of the IMF.

Public-Private Partnership in
Indian Infrastructure
Development:
Issues
and
Countries like China, have developed
toll roads
and Options
a number of private

sector greenfield power projects, while Argentina has developed its

power sector mostly through divestiture and greenfield investments. The
main aim of the Chinese is to attract investors through PPP.
Brazil has not only attracted more greenfield projects in power sector
but also known for its telecommunication sector development under PPP
model.
The UK provides guarantees for PFI projects to attract more investment.
Chile, on the other hand, has succeeded in the PPP model with
institutional development, standardised contract procedures and
appropriate risk sharing mechanism.
Therefore, it is rightly accepted that right type of private participation in
the infrastructure development with right risk sharing is the only way
out to build public infrastructure and thereby bridge the infrastructure

Urbanization: Current pace &

future
needs
Urbanisation is central to Indias strategy of

faster

and inclusive growth

agglomeration and densification of economic activities
and habitations in urban conglomerations stimulates
economic efficiencies
facilitates greater entrepreneurship and employment
opportunities
strong rural-urban linkages catalytic for realization of the
potential of urbanisation

Urbanization in India is characterized by increase in

the number of cities

Urbanization: Current pace &

Pace of urbanization
future
needs is accelerating

in the decade 2001-11, share of persons living in urban areas rose

by 3.35 per cent (as against only 2.10 per cent in the decade
1991 to 2001)
about 31 per cent (377 million) of Indian population live in urban
areas (Census 2011)
Only one state now (Tamil Nadu) is more than 50 per cent
urbanized by 2030 it would be 5 states

Contribution of the urban sector to GDP

risen from about 38 per cent in 197071 to 63 per cent in
200910 and around 70 per cent at present while
employing only 27 per cent of the work force

Urbanization: Current pace &

future
needs
Need for a comprehensive framework of urban

policy &
planning for quality infrastructure, services & growth &
productivity enhancing environment
Municipal fiscal sector is tiny in India
ULBs account for only 2-3 per cent of the combined revenue
and expenditure of Central Government, State Governments
and ULBs
McKinsey Study (2010) on Indian urbanization projects a
capital investment need of US$ 1.2 trillion over the 20 year
period 2010-2030
this implies that India has to boost its annual per capita urban
capital spending from US$ 17 (as compared to US$ 116 in China,

CURRENT PRIVATE
STRATEGIES &

FINANCING
ISSUES

Municipal Bonds
Municipal
financing
traditionally
through
budgetary
allocations/internal revenues of ULBs
Since 1997, only 28 municipal bond issues by a few strong
ULBs have taken place in India and mobilized nearly `30
billion most of them private placements
Most of the municipal bonds have been issued without a
government guarantee
Most bond issues to fund water supply & sewerage projects
easier enforcement of user charges/tariffs & predictability of
revenue generation
Very few ULBs appear to be planning for market borrowing as
20 rating by MoUD
a source of finance for them despite credit

Municipal Bonds
Plausible reasons for inability to access markets
investment grade ULBs do not have cost effective access
to finance as they are still considered to be riskier than
corporates of same rating
development of market is significantly linked to the
financial position of states devolution & grants
predictability of transfers
absence of active secondary bond market
budgeting and accounting systems of ULBs still lack
transparency
21
poor project evaluation & lack of specialized
project

Pooled Finance
Encourages state governments and mid-to small-sized ULBs
to pool their projects to achieve a marketable size of the
pooled bond issuance
Provides risk mitigation for the investors
Reduces interest cost and are rated higher than those of the
underlying borrowers
Usage has been low so far
only Tamil Nadu (Tamil Nadu Urban Development Fund) &
Karnataka (Karnataka Water & Sanitation Pooled Fund)
have issued municipal bonds by pooling
Pooled Finance Development Fund (PFDF) of GoI for
credit
22

URBAN INFRASTRUCTURE
FINANCING INSTITUTIONS

23

Public Financing
Term lending is an important means
Institutions
development but has remained modest

to finance infrastructure

HUDCOs lending to the sector now accounts for only about 20 per
cent of overall lending : HUDCO & LIC on a declining trend bank
lending too has stagnated
Problem lies with lack of good projects in urban infrastructure,
diminishing ability to extend state government guarantee & recovery
related issues
IL&FS , IDFC, etc. are other specialized public financing institutions
for urban development mainly to SPVs/private infrastructure
providers
Pooled Municipal Debt Obligation (PMDO) credit facility
IL&FS, in partnership with IDBI, IIFCL, Canara Bank and
24 eleven

Multilateral Financing
Institutions
Multilateral institutions like Asian Development

Bank &
World Bank have financially supported some of the urban
infrastructure development initiatives (e.g., Bangalore
Metro by the ADB)
Issue of service delivery accountability, lack of expertise
with ULBs, perception of opacity & risks involved with
ULBs

25

Bank financing regulatory

framework
Reserve Bank has provided certain concessions/relaxations

with

regard to lending to infrastructure sector

enhancement in single/group borrower limits, permission to issue
guarantees favouring other lending institutions in respect of
infrastructure projects, asset classification benefits under
restructuring guidelines, permission to extend finance for funding
promoters equity subject to certain conditions, etc.
Banks are permitted to finance SPVs, registered under the
Companies Act, set up for financing infrastructure projects
Allowed debts due to the lenders in case of PPP projects to be
considered as secured to the extent assured by the project authority
in terms of the Concession Agreement
Direct lending for specific monitorable projects but not for budget
financing
26