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Finance for infrastructure projects continues to be a critical issue despite all recent packages. As the industry weighs in the available options, it will be important to look at short term as well as long term solutions. Niranjan Mudholkar reports

India continues to show strong resilience in the face of recession compared with other leading economic powers today.

The Asian Development Bank (ADB) has acknowledged this and expects India to recover faster than most developed countries. Even in the current scenario, our GDP is well on course to register a 6%+ rate in the forthcoming fiscal. The key driver of this growth will be the infrastructure industry.

Therefore, it is only natural that more investments will have to be made in this sector to sustain the momentum and then build over it.

The government, on its part, is trying to support the sector with packages and policy reforms. However, with recessionary sentiments creating an atmosphere of gloom, investors are discouraged and more impetus will be needed.

Hemant Kanoria, chairman & managing director, Srei Infrastructure Finance Ltd (SIFL), putting it in a nub says: “The Indian infrastructure industry is facing one of its biggest challenges in recent times. Following the global meltdown, sentiments in the Indian financial system have turned weak.

High cost of funds and the banking system’s reluctance to dispense funds for infrastructure projects has slowed down implementation of projects. A crucial fund source, namely foreign funds, too has become hard to come by resulting in infrastructure projects getting stalled.”

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Damage control

Recently, the government had announced stimulus packages to boost the infra sector. But these need to see implementation within a reasonable timeframe. “The industry has welcomed the announcements of these packages but is awaiting implementation of these packages. We need to see some action,” says Amitabh Das Mundhra, director, Simplex Infrastructures.

“Already efforts to ease the flow of cheaper credit into the system are underway. This is expected to re-start the development of infrastructure,” says Kanoria. Snehal Mantri, director, marketing, Mantri Developers agrees that the government packages are encouraging and will act as a stimulus to infrastructure development activities.

Currently, the government is relooking some of its policies to pull in investors. For example, the National Highways Authority of India (NHAI) has set a target to attract more than Rs70,000 crore for highway development in the forthcoming fiscal (2009-10).

It is planning to modify the revenue sharing model in favour of private developers to attract finances. NHAI is, in fact, considering dropping ‘the revenue sharing clause’ thus allowing concessionaires to recover investment and make profit for a longer period. As per the modification, a concessionaire will be allowed to keep the entire revenue until it reaches projected daily traffic on the highway and remains at the level for three successive years.

Financial closures

But getting the projects on the ground means ensuring that important infrastructure projects achieve speedier financial closure (FC). Siddhartha Das, PPP practice leader at Ernst & Young says the government has taken ‘operational control’ and rightly so, to ensure that projects achieve FC.

“The Indian banking sector is public sector driven; this gives the government enormous leeway in these difficult times. A hands-on control is having the desired effect. The challenge is to identify and address the operational issues so that funding is available. The government seems to have its ear to the ground judging from the experience of the FC for NHAI road projects,” he adds.

It is essential that government closely monitor this model and replicate it for other infrastructure projects. “Tweak the structures or change them completely so as to get more projects on the table; keep an ear to the ground to understand and evaluate the situation; act as facilitator at every stage by coordinating with public sector banking system; and, if necessary, ensure that financing is available for infrastructure,” Das adds.
 
The global crunch has emasculated the international finance market. It would be unreasonable to expect much from foreign investors. Experts are of the opinion that there is money available in the domestic market.

As Luis Miranda, president & CEO, IDFC Private Equity Co Ltd said during a recent infrastructure conclave, domestic capital is available but government needs to make investments attractive. Tushar Mehendale, MD, ElectroMech Material Handling Systems (India) Pvt Ltd agrees: “The finance situation seems to be improving with the government taking a lot of positive steps to boost liquidity. As a result, banks are flush with liquidity which desperately needs to find its way to the market.”