This stance of the central bank signalling tentativeness on financing infrastructure is surprising, given the critical role that the sector plays in the economy.

Reinforcing the importance of infrastructure development, the Planning Commission, in its latest annual Plan, noted, "There are many critical areas that directly affect the quality of life of every citizen, and where the Government has a role. These areas include the provision of social and physical infrastructure required for development... "

The Prime Minister, in his Independence Day address (2004) to the nation, identified Saat Sutras — seven priority sectors as "pillars of the development bridge — to ensure higher economic growth and more equitable social and economic development". These are agriculture, water, education, healthcare, employment, urban renewal and infrastructure.

The Planning Commission has reiterated the need for world-class, cost-effective infrastructure in the context of a globalising economy.

It adds in its Annual Plan, "the quality of infrastructure in India is normally perceived far below the level required to achieve and sustain high levels of growth," while stating, "We are committed to removing the inadequacies in infrastructure facilities through a mix of policy and fiscal measures."

The Finance Ministry, in its mid-term review of the Tenth Plan, categorically noted that, "The strong economic performance in 2004-05 so far has been associated with high growth rates in transportation."

It is essential that the central bank immediately accords `priority' status to infrastructure for credit delivery. The misgivings expressed in the Monetary Policy may be unfounded for the following reasons:

According to a World Bank-CII survey, small and medium enterprises located in regions with more infrastructure bottlenecks have shown lower productivity.

Sluggish credit growth in agriculture can be attributed directly to the lack of basic infrastructure, apart from the oft-quoted deficient rainfall. Similarly, sluggish growth in small industries is a fall-out of the dismal power situation in most States, compounded by regulatory burdens and non-availability of adequate bank credit. On the other hand, the reported infrastructure credit growth is bound to have a lagged positive effect on the future growth of agriculture and SSI sectors.

If sectors that impact large population and weaker sections and are also employment intensive alone are eligible for priority status, infrastructure is a fit case.

Classic cases from around the world illustrate how a dictator-ruled Chad-generated employment in thousands and doubled its GDP through an oil pipeline, or how impoverished Mozambique made developmental success of an aluminium smelter, or how Vietnam lifted poor farmers from subsistence levels to comparative luxury through a sugar plant. In these poverty-stricken countries, it was just one infrastructure project that had made the difference.

Probably, the unflattering backdrop of high-profile infrastructure financing debacles is still haunting the central bank. But this should not deter further infrastructure financing. Dabhol did not fail because of lacunae in credit appraisal by banks.

Political risk was its undoing; that lessons have been well learnt is evidenced from the ongoing efforts to revive the project. The Noida Toll Bridge project needs financial restructuring because it was beleaguered by the risk typical to such projects — traffic. Standard and Poors' has concluded that nearly 90 per cent of toll road projects overestimate traffic volumes.

Under World Bank funding, some major projects have not delivered, since tardy implementation sets off triggers, cutting off funding.

It is to the banking system's credit that large banks such as the SBI, ICICI Bank, Canara Bank and others have persisted with project finance in spite of the possible asset-liability mismatches in their balance-sheets, or the project and market risks of long-term lending.

However, they seem keen on taking only small exposures. It is learnt that the SBI has allocated a mere Rs 1,000 crore for project financing this year. ICICI Bank's exposure to project finance was only 15 per cent of its total advances last year, despite the inherent project lending expertise of the erstwhile ICICI.

IDFC, the apex institution for infrastructure financing, has disbursed Rs 3,700 crore in 2004-05.

Compared to some estimates, indicating the need for infrastructure funding in India at Rs 200,000 crore over the next three years, the above financing so far by banks and institutions seems grossly inadequate. Other estimates may differ on projections, but all of them are equally staggering. With characteristic high leveraging, these projects would demand huge funding from the banking system, institutional investors, and bond markets.

In his analysis of worldwide project financing markets, Prof Benjamin Esty of the Harvard Business School concluded that, typically, 80-90 per cent of project funding was through bank debt. Bonds are a good source of long-term debt, and carry fewer covenants and restrictive clauses compared to bank loans. But bonds lack the flexibility of bank loans and have to be rated and, hence, are selectively preferred by project sponsors.

However, the growing bond markets afford ample opportunities to institutional investors such as LIC to invest its long-term funds. Coupled with the fact that successive monetary policies have phased out institutional investors from the call money market, LIC and others with long-term funds should be encouraged to invest more in project bonds.

Banks have a vital role to play in financing infrastructure. Several years ago, export credit was declared a national priority to bolster the country's foreign exchange earnings. Over the years, innovative financial instruments, institutional support for risk mitigation in the form of ECGC and Exim Bank and a whole body of knowledge have evolved to support bank financing to exports.

Similarly, declaring infrastructure financing a national priority would help evolve policies for banks to access long-term funds and embark on innovative deal structures to mitigate the impact of project and market risks, without impairing banks' profitability. The liquidity risk banks would face by investing in long-term assets can be mitigated through securitisation of project loans.

Banks have to re-learn a few skills to financing infrastructure in a big way. The sooner the central bank facilitates the process, the better it is for the country.

(The author is a finance consultant and visiting faculty at IIMs. She can be reached at padmalathasuresh@yahoo.com)

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