Accelerating Infrastructure Development Financing of Infrastructure

1. Accelerating Infrastructure DevelopmentFinancing of Infrastructure Presentation by Ms Anna Roy Director, Finance Secretary Office Ministry of Finance, Government of India at Sri Lanka Economic Summit, Colombo, 7th July, 2010

2. Context India’s annual growth rate following economic liberalisation of 1991 has been 7 to 9% Accelerated growth mainly in manufacturing & services sector Investment in infrastructure only 4-5% of GDP upto X Plan (2002-07); 9-10% in East Asian economies Infrastructure mainly in public sector; suffered from inadequate resources and inefficiencies Accelerated GDP growth with inadequate investment in infrastructure accentuated the infrastructure deficit

3. Paradigm shift Infrastructure given high priority in XI Plan (2007-12); with emphasis on private participation Target of increasing investment in infrastructure to 9% of GDP by 2011-12 Increase in investment from US $ 227 b in the X Plan (2002-07) to $ 514 b in XI Plan (2007-12) Private investment to increase from 25% ($ 56 b) of total investment in X Plan to 36% ($ 186 b) in XI Plan Architecture of governance, policy & financial framework evolved to meet this challenge

4. Investment in Infrastructure

5. Key Initiatives Constitution of COI/CCI under chairmanship of Prime Minister to steer the process PPPAC for fast track appraisal and approval: cleared 192 proposals for $ 41b since 2006 IIFCL set up to meet the demand for long term debt; sanctioned $ 6 b for 139 projects Viability Gap Funding (VGF) Scheme to meet the gap in financial viability of projects Standardisation of documentation and processes

6. Issues in Financing Budgetary resources limited, especially on account of increasing emphasis on social sectors and fiscal consolidation Focus on self-sustaining projects to be funded out of tariff/user charges Budgetary allocation mainly for rural, remote areas, and for leveraging debt and private investment

7. Issues in financing (contd.) Shift to debt-based financing of projects by PSUs and private sector Shift to self-sustaining infrastructure has led to a sharp increase in debt financing Debt funding, especially long term, has emerged as the major concern Total debt requirement projected for XI Plan is $ 257 b; anticipated gap of $ 50 b

8. Financing the XI Plan (first 3 years)

9. Financing required in 2010-12 In US $ billion

10. Key issues in debt financing Inability to tap insurance and/pension funds Tenor (Asset-Liability mismatch) Shallow bond market Regulatory norms and restrictions ECB restrictions

11. Shallow Corporate Bond Market Market characterised by low liquidity Inadequate credit enhancement Only 12% of bonds raised for infrastructure; much lower than international levels Banks do not find corporate bonds attractive due to regulatory restrictions As a result, banks and corporates unable to raise capital

12. Constraints on Bank lending Banks have increased infrastructure lending 40 times from $ 7 b in 2000 to $ 60 b in 2009 Now face an asset-liability mismatch Shallow debt markets and no access to ECBs constrain long-term lending Exposure to sectors, projects and borrowers is a regulatory concern

13. Insurance/Pension Funds Regulatory restrictions on insurance & pension funds Pre-emption for government and other approved securities Stringent credit rating requirements render most of the projects ineligible SPVs and unlisted companies can not borrow from insurance & pension funds

14. Road Ahead Efforts to create vibrant corporate bond market has been intensified IIFCL is working as force multiplier Credit enhancement for attracting Insurance & Pension funds Strengthening institutional mechanisms to promote financing initiatives Concerted efforts to enhance private participation