Issues Of Finance

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Issues of finance, ownership, operation and maintenance of all kinds of infrastructure

Issues of finance

For quite some time, the decline in asset quality under infrastructure financing has been a key area of concern for the banking sector in general and the Public Sector Banks in particular. Accordingly, several regulatory measures to de-stress the balance sheets of banks have been taken in recent times by RBI. These measures have helped in large measure in building confidence among the banking community to have a fresh look on infrastructure financing which was facing a huge cash crunch.

In its endeavour to attract funds, RBI has allowed companies in the infrastructure sector to raise External Commercial Borrowings with a minimum maturity of five years and with an individual limit of US $ 750 million for borrowing under the automatic route. It has also notified 100% foreign direct investment under automatic route in the construction development sector.

High capital intensity, low operating cost, higher gestation period, near absent risk mitigation measures, difficulties in getting environment clearance, inability to generate direct adequate income streams to selffinance are some of the challenges in infrastructure financing. These adversely impact the private sectors’ appetite to commit long term capital. Private financiers’ confidence level has been dented due to issues relating to stressed assets, land acquisition, rehabilitation, environment etc. As per one estimate, nearly 50% of infrastructure projects languish at various stages of implementation due to variety of regulatory hurdles and sector specific bottlenecks leading to significant time and cost over runs. The silver line, however, in India, is its resilience in the face of recent domestic macro-economic shocks and international financial crises.

 

 

 

Issues of ownership and operation

Public Ownership and Operation

The traditional mode of infrastructure provision, with the government being both the owner and the operator of the infrastructure, offered limited or no scope for private sector participation. However, some countries have devised mechanisms for attracting direct private financing or for facilitating the operation of public infrastructure under commercial principles. One way that a government can achieve the desired objective is by establishing a separate legal entity, such as a joint stock company, controlled by the government but managed as an independent commercial enterprise, subject

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to the same rules and business principles that apply to private companies. Some countries have a well-established tradition in operating national infrastructure through these types of companies. Opening the capital of such companies to private investment, or making use of such a company’s ability to issue bonds or other security may create an opportunity for attracting private investment in infrastructure. Some of these companies have been used as a Special Purpose Vehicle (SPV) for raising private funds for infrastructure investment via the project finance mode. In the Indian context, this model is being widely followed in railways, irrigation projects, power and road finance, etc. The Konkan Railway Corporation Ltd. could be cited as a specific example.

Public Ownership and Private Operation

There are various ways in which the entire operation of the public infrastructure may be transferred to private entities. One of the possibilities is to give the private entity, usually for a certain period, the right to use a given infrastructure, to supply the relevant services and to collect the revenue generated by that activity. Such infrastructure may already be in existence, or may have been especially built by the private entity concerned. This combination of public ownership and private operation has the essential features of arrangements, which in some legal systems may be referred to as ‘public works concessions’ or ‘public services concessions’.

 

Private Ownership and Operation

Under the third option, the private entity not only operates the infrastructure, but also owns the assets related to it. Here, too, there may be substantial differences in the treatment of projects under national laws, for instance, whether the government retains the right to reclaim the title to the infrastructure or to assume the responsibility for its operation and so on.

Where the infrastructure is operated pursuant to a governmental licence, private ownership of physical assets (e.g. telecommunication network) is often separable from the licence to provide the service to the public (e.g. long-distance telephone services). In such cases, the licence can be withdrawn by the government under certain circumstances. Thus, private ownership of the infrastructure may not necessarily entail an indefinite right to provide the service.

 

 


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