Reforms are essential to the success of project financing, writes Sachin Sandhir
In emerging economies like India, infrastructure development is a priority as we attempt to compete in the international economic arena. Traditionally, the state assumed the responsibility of funding infrastructure projects. Today, India is on the brink of a new era in project financing and infrastructure project development. There is an ambitious target to spend US$1 trillion in the sector by the 12th plan. However to generate this level of investment there is a need to change not only the approach to handle such projects but also engage and involve the private sector to a much larger extent. The government, which faces significant debt and fiscal challenges that limit its ability to fund this investment, expects the private sector to provide as much as US$500 billion of the funding. Recognizing the significance of the role of private sector, the Government has public private partnerships (PPP) at the centre of its strategy. Also the establishment of IIFCL to provide much needed long-term debt at commercial terms specifically for promoting such initiatives has been considered an important development in view of the limited availability of long term debt for infrastructure financing. Additionally, the ability of IIFCL to leverage government guarantee to generate low cost and longer tenure funds is critical to its catalytic role. However, to ensure success, at the core of all such well-functioning partnerships, be it BOT, BTO, DBFO or any other variant, should be a carefully structured contract that is both affordable and bankable, with clear transfer of project risks to the private sector, together with tight public control to ensure that output and quality of service specifications are met. This makes it imperative to undertake a risk assessment and mitigation exercise prior to entering into any contractual agreements as financing development projects not only requires lenders to commit for long maturities, but also exposes them to several risk factors arising out of socio, economic and political confluence. Therefore, it is imperative that the project financing discipline is built on understanding the rationale for financing, preparation of financial plans, assessment of the risks, designing financing models, and allocation of risks. So, while the government has pursued reforms for establishing a framework conducive for infrastructure development and broadening the range of financing modalities, significant scaling up of infrastructure investments still faces formidable challenges. Gaps in technical and management capabilities and in identifying market opportunities indicate that state and central authorities across various sub-sectors have not completely grasped the potential of infrastructure development through PPPs. Substantive and sustained institutional and market reforms in the financial sector are required to channel resources from domestic and internationally available debt and equity sources to infrastructure. Without reforms, it will be difficult to significantly enhance the market-based flow of resources from commercial banks, DFIs, as well as pension and mutual funds to meet the demand for infrastructure financing.
Sachin Sandhir is Managing Director & Country Head, RICS India. He can be contacted at ssandhir@rics.org
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