Financing infrastructure in India

Aresearch paper under the above title, coming out of the IMF stable, opens the window to some new thinking of relevance to the efforts India is making to find resources of the order of one trillion dollars during the next five years for investment in this vital sector.

It is a truism that without putting in place commensurate infrastructure of high quality, all hopes of raising and sustaining economic growth, expansion of trade and production and productivity at a high enough rate to be abreast of the demands for even the basic amenities of a burgeoning population, leave alone the clamour of the ambitious middle-class for higher lifestyles, will be dashed to the ground.

There is a virtuous circle inherent in higher growth. Government revenues will register marked increases, facilitating greater and more affordable as well as accessible investments which, in turn, will accelerate the pace of growth and push up revenues further.

Also, as the paper observes, private capital markets deepen during periods of infrastructure investment in terms of both bank credit and bond finance, and conditions for private financing of infrastructure and launching of public-private partnerships (PPP) improve along with the flow of additional financing.

At the same time, however, there is also an imperative need to guard against lopsidedness and imbalance in the development of infrastructure. Variabilities and vagaries in the availability, composition and quality of infrastructure can do far more harm than inadequacies and gaps. For instance, if, because of poor work culture and neglect of maintenance, the quality of power suffers, it can throw into disarray every other sector of the economy.

“INFRASTRUCTURE BOOMS”

Again, India has no doubt had a runaway success in catapulting telecommunications to the top, but it has failed to jack up project funding for energy security, surface transportation, ports and air terminals. The deficiencies in the various categories act and react on each other and cumulatively pull down the rate of growth itself.

The merit of the IMF paper lies in the comparison it draws between the situation in India and the experiences of creating what it calls ‘infrastructure booms' in Brazil, Chile, Chile and Korea. It is not clear why exactly these four countries were chosen, unless it be for some fresh approaches that they had adopted to generate resources and attract investment in the context of certain commonalities of emerging market economies.

Here is a gist of the paper's findings: Chile and Korea have been relatively successful in developing local bond markets to support relatively long-term issuances by infrastructure companies. The role of bank finance was secondary to other sources such as pension system in Chile and foreign and individual investments in Korea, while in China and Brazil, public sector banks took a predominant share of infrastructure financing.

FRUITFUL COURSE

The willingness of institutional investors in Chile to buy bonds issued by wholly private companies, and the solvency rating of large public sector electricity companies in Korea and Brazil enabling them to issue debt in international credit markets have also contributed to the tempo of infrastructure financing and project construction. Korea has benefited largely from investments by foreign companies in publicly-guaranteed infrastructure funds, whereas Brazil has gone in for PPPs in a big way.

The comparative study concludes by pointing out the extremes that China and Chile stand for: In China, foreign participation in infrastructure is minimal, while in Chile, a competitive electricity sector is operated to a large extent by foreign-owned multinationals and foreign companies bid for and buy road construction and operation PPPs along with domestically-owned companies.

The paper considers the most fruitful course for India is to be able to mobilise the funds of institutional investors who have been putting them mostly in government securities and develop the new pension scheme so that its assets can be put to work in the field of infrastructure.

The latter approach would require large insurance companies and pension and provident funds being allowed to diversify into infrastructure bonds issued by private insurance companies, without minding the exposure to the credit risk of such bonds.

Whatever it be, innovative funding is the key and ‘full steam ahead' the motto.

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