Trends & Outlook for Infrastructure Finance

Trends & Outlook for Infrastructure FinanceIntroductionInvestment target of $1 trillion in the infrastructure sector for the twelfth plan periodHowever, achieving the target could be a challenge in the current scenario of slow economic growthFurther, these sector face specific issues, which are compounded by the current policy paralysis in the country. A look at the recent developments in infrastructure financeinfrastructure investment in India as a % of GDP increased from 5.1 % to 7.2 % in the eleventh planIndia achieved about 90% target of the infrastructure investment target of $ 500 million in the eleventh plan, through a combination of private investment in the energy and telecom sector, and PPP in transport sector.Continue..The share of private investments in infrastructure increased from 25 % in the tenth plan to 36% in eleventh planThe governments expects this share to increase to 50%, implying private investments of 32.5 trillionRemaining 50 % will be met through budgetary sources.ContinueInfrastructure projects in India are usually funded in a debt- equity ratio of 70: 30Most of the debt financing comes from banks, NBFC, ECB, followed by insurance and pension fundsThe average tenure o loans is 13-14 years, including construction period of above 5 yearsInterest rates are normally linked to PLR of lendersContinue..Debt financing of infrastructure projects is mainly undertaken on a non-recourse basisThe current environment for debt funding in India is marked by high interest rates which are 13-14 percent for senior debtCommercial banks meet more than half of the total debt requirements for infrastructure investments

Continue..Acc to RBI, the gross outstanding bank credit to the infrastructure projects witnessed a compound annual growth rate of 32 percent between 2007-08 to 2011-12

Most banks have almost reached the prudential caps for sector such as power and roads. Further banks are faced with problem of ALM

Continue..In order to address the ALM issue, IIFCL has launched a modified takeout financing scheme in December 2011As on March 31, 2012, IIFCL has sanctioned a total of 403.73 billion for 229 infrastructure projectsThe cumulative disbursements at the end of March 2012 stood at 203.77 billion, including the refinancing of 41.68 billion and take out financing of 6.35 billionContinue..NBFC such as PFC, REC, IDFC Limited, Srei Infrastructure Finance Limited, Indian Railway Finance Corporation, L& T infrastructure finance company Limited have increased their lending to infrastructure projects, driven mainly by focused business , modelsBetween 2007-08 and 2010-11, disbursal by these NBFC recorded a CAGR of 30 %Continue..Rising domestic interest rates had led developers to tap foreign marketsECB and FCCB witnessed a CAGR of 5.6% between 2007-08 and 2011-12, and more than doubled to $ 21.66 billion in 2011-12 from $ 10.48 billion in 2010-11However in wake of Eurozone crisis, accessing capital through ECB become very difficultContinue..Further, ECB borrower has to hedge against foreign exchange risks. The situation is further aggravated by depreciation in rupee valueThe pension and insurance funds which can be source of long term debt are still inactive.The bond market in India is no developed. It account for 2% of GDP as compared to 8% in China and 15% in Malaysia

Continue..Equity for these projects comes generally from promoters, through private equity and IPOAnd offering have also gained ground in in the past three to four years. Between 2007-08 and 2011-12, 650 million was raised by 50 infrastructure companies in the primary market. However, weak market sentiment and limited liquidity in the market have resulted in poor capital market conditions

Continue..Key challenges in securing funds for developers at reasonable rates are high cost of borrowings , weak market sentiment and sector specific issuesAggressive bidding in the road sector has put the financial viability at stake Inadequate coal linkage in the power sector has resulted in uncertain situationContinue..In case of port and airport, there has been delays in award of projectsFactor such as inability of the developers to achieve financial closure , delays in project execution and inadequate revenues have affected project developers

Solutions There is urgent expedite the process related to land acquisition and obtaining approvals and clearancesThe land acquisition, Rehabilitation and resettlement bill, 2011, which is approved in Sept, 2012, makes land acquisition more expensive by fixing the compensation for rural areas at four times the market rates and for urban it is kept two times the market ratesContinue..There is a need to have single window approval mechanism There is need to have strongest bond marketFurther liberalize the pension and insurance fundsSet up IDF