Genesis: For achieving sustainable economic growth, it is imperative that efficient and adequate infrastructure services are made available to trade and industry. In the Indian context, it is the government sector that largely provides infrastructure services through hefty budgetary allocations. However, the ever widening gap between demand and supply for infrastructure facilities in India and fast reducing budgetary resources to support capacity additions, have led to a search for new avenues of financing the infrastructure sector, e.g. private and foreign participation.
A sum total of all those activities undertaken in the financing of infrastructure development are known as ‘infrastructure financing’.
According to the RBI, infrastructure financing refers to any credit facility extended by banks and financial institutions for developing, operating and maintaining any infrastructure facility.
Infrastructure for the purpose of the above definition covers the following sectors:
(1) A road, including toll road, a bridge or a rail system
(2) A highway project
(3) A port, airport, inland waterway or inland port
(4) A water supply project, irrigation project, water treatment system, sanitation and sewerage systems or solid waste management system.
(5) Telecommunication services whether basic or cellular, including radio paging, domestic satellite services (i.e. a satellite owned and operated by an Indian company for providing telecommunication service), network of trunking, broadband network and internet services.
(6) An industrial park or special economic zone.
(7) Generation and distribution of power, transmission or distribution of power by laying a network of new transmission or distribution lines.
(8) Any other infrastructure facility.
Financing Options: According to the Expert Group on the Commercialization of Infrastructure Projects funds requirement of a staggering order will be required to finance the infrastructure sector in the years to come.
Although a major chunk of about 85 percent of the requirements will be met from domestic savings, the balance has to come through innovative approaches to financing of infrastructures projects. Such innovative financing approaches depend on the length of the gestation periods, the magnitude of infrastructure projects and the relatively high risks associated with these projects. There are two major approaches that could be thought of as equitable risk sharing arrangements in the financing of infrastructure projects which are as follows:
* The Concession Approach
* The Structural Financing Option
Concession Approach: Under this approach, the concessionaire who is thereafter granted a franchise to operate for a specified period builds the project. Costs and returns will be recovered by the franchise from the operations of the project. This approach works under various modes as described below:
BOT: This is ‘Build, Operate and Transfer’ project. The most innovative option was the Rs 7 crores toll road revenue bonds issue, the first of its kind in India by Madhya Pradesh Tolls Ltd., (MPTL) to fund India’s first private sector road project. MPTL is jointly promoted by Infrastructure Leasing and Financial Services (IL&FS) and the Madhya Pradesh State Industrial Development Corporation (MPSIDC)
BOLT: This is ‘Build, Operate, Lease and Transfer’ project. The “Own Your Wagon” scheme currently in operation in the Indian Railways, is a variant of BOLT under which a set of wagons purchased by private parties is leased to the Railways on a fixed rental.
BOOT: This is ‘Build, Own, Operate and Transfer’ project, The Rs 4,800 crore Elevated Light Rail Transit System (ELRTS) in Bangalore is to be run on a BOOT basis over a 30 year concession period.
BOO: This is ‘Build, Own and operate’ project. Paradip Port Trust has signed an agreement to construct Rs 1,500 crores floating dry dock at Paradip in Orissa in collaboration with Standfield of Scotland on a BOO basis.
BOOS: This is ‘Build, Own, Operate and Sell’ project. These forms of private sponsor participation are often much better vis-à-vis traditional financing options, both with regard to risk reduction as well as equitable distribution of risks.
Structured Financing Option (SFO)
SFO generally assumes two forms as described below:
Non-recourse financing: Under this option, the cash flows generated by the project secure the debt instrument or the collateral value of the specified assets financed by the instrument. In the event of default on the structured instrument, the debt holders’ recourse would be limited to the underlying assets only and would not extend to general reserves and assets of the company. Panvel (Mumbai) By-pass is the first example of SFO in India involving IL & FS, Hume industries (Malaysia), Ministry of Surface Transport (MOST) and Maharashtra Government.