Thursday, January 18, 2007

Source of Funds for Infrastructure

Infrastructure is limiting our growth prospects in the future. Now that the Government is waking up to the reality, there is a question mark over the source of funds for other infrastructure projects. It’s a nagging issue going by the whopping $320 billion required over the next five years.

An article in ET points out the way. It can be divided into two sections: Debt & Equity

Debt Financing: There is a gamut of options for debt financing, including domestic commercial banks, domestic term-lending institutions, domestic bond markets, specialised infrastructure financing institutions like IIFCL, international commercial banks, ECAs, multilateral agencies, among others.

There has to be a careful mix of domestic and external financing. Both the Reserve Bank of India (RBI) and the government are looking to enlarge the existing $18-billion ECB window for infrastructure, even as this limit has not yet been breached. At an infrastructure summit organised by CII recently, finance minister P Chidambaram was measured in his response to debt inflows. “While debt inflows have an impact on the monetary system, non-debt flows can be inconsequential,” he had said.

According to Infrastructure Development Finance Company CEO Rajiv Lall, “concerns on the inflation front arising out of debt flows can be addressed by sterlising such flows. Domestic money supply should not be affected by it.” He emphasised the importance of recognising long-term debt paper as a separate asset class.

Equity Financing: The various sources for equity could include domestic and external sources, domestic and international developers, public utilities, institutional investors, equipment suppliers and dedicated infrastructure funds, among others.

“There is a dearth of equity financing in the sector. Of the $77 billion required of the private sector, at least $20 billion should be through equity,” said Mr Lall.

Typically, equity financing can be either strategic equity or financial/private equity. While project sponsors are an important source of equity, they can at best account for only a part of the total equity. International infrastructure funds can mobilise resources for investment in infrastructure projects by tapping into global capital.

Global financial services major Citigroup is understood to be in talks with the government to start a $5-billion infrastructure fund with $3 billion for debt and $2 billion for equity infrastructure fund in partnership with IDFC. It has been estimated that nearly 11% or $39 billion of the total $350 billion required for infrastructure projects should be routed through multilateral agencies like the Asian Development Bank and the International Financial Corporation (IFC).
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