Pricing and financing of infrastructure projects; the challenge before the indian policymakers

Abstract

Ever since the economic reforms started two decades ago, India has been trying to lead the developing nations in terms of building their infrastructure. The challenge of government‟s fund constraint has been tried to put behind by allowing flow of funds from private sources with regulatory control in government own hand. However, with the global economic crisis that had knocked heavily at the doors of Indian economy too during last couple of years, it was found that developmental bottlenecks for infrastructure sector has escalated in spite of the best efforts by the government.Arranging of Debt and equity capitals are major financial investment concerns for infrastructure developers today. While studies reveal that issues like land acquisition, utility shifting, discrepancies in DPR, state support agreements, dispute resolutions are still considered to be critical for an infrastructure development projects, more recently the loose ends at the financial structures of many projects are posing as more vulnerable threats. Especially in the period of economic recession, the financial organizations have tightened their hands and as a result project cash flows are affected at halfway round. As the investment retrieval periods are going to be prolonged, the investors are facing uncertainty on their assured return. The commercial banks which had already reached their sectarian limits; still tried to backed promoters with decent track records, with clearances in place and well defined business plans. However, very few projects could achieve financial closure during past two years. The participation rates in recent biddings of PPP projects are also not encouraging, especially in Highway sector. More recently, there have been reports of NHAI favoring for moving back to the old EPC mode. Salient features of few case studies of Indian projects have highlighted that there is no project specific debt equity ratio and it may differ from project to project. Study by the authors also reveals that availability of debt in India is Sector specific and projects are still being supported with generous government grant varying upto 70% in case of Jawaharlal Nehru National Urban Renewal Mission (JnNURM) schemes. However, the principal concern remains for retrieval of at least 20% return on the investment by the private party. A fair bidding, a robust agreement and the well planned pre-constructional activities can be beneficial to all the stack holders of the infrastructure development project. But whatever be the planning, with the complexity of multiple issues involved for choice of funds,one has to keep in mind that investments in infrastructures are non-recourse in nature. At the same time the sharing of responsibilities in a pre-framed manner proves to be successful in many occasions for the participants concerned and reflect a win-win situation for all.