an overview of infrastructure financing in india and future options
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Think Infrastructure.Think IDFC.
Rajiv Lall, Ritu Anand and Nirmal Mohanty
Infrastructure Development Finance Company
An Overview of Infrastructure Financing inIndia and Future Options
November 17, 2007
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Introduction
Economic (9% growth per annum)
Indias medium-term ambition
Political (Inclusive growth)
Infrastructure has a significant role to realize both.
Government envisages a rise in infra spending from 5.6 % of GDP in 2006/07 to9.2% in 2011/12 to enable 9 % GDP growth in XI Plan.
Two sets of issues are impeding investment in infrastructure:
- Sector governance (brief discussion)- Financing system (focus of discussion)
Inability to meet the specific requirements of infrastructure
projects
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To support accelerated investment in infrastructure,sector governance must change.
Two characteristics of recent approach to infrastructure investment
Declining dependence on budgetary resources
Increasing reliance on private participation
Challenges for sector governance emerge from: reduced budgetary support
User charge financed strategy needs to assure investors of adequatepayment security (over a long period) and consumers of competitive tariff
Higher private participation
Level playing field, greater consistency and predictability of `rules ofgame and public consultations
But political economy is inhibiting such change in governance
Govt unwilling to give up its role as provider and regulator, although it iscreating facilitating frameworks; for example:
Newly created state-owned power utilities are acting as extension ofGovernment
`Open access is provided by Electricity Act, but States have beenreluctant to phase it in
Investment will be impeded if governance response is not appropriate
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GCF in infrastructure: bottom-up estimates by PC
(At 2006-07 prices)
Year 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
2006/07 prices Current prices
GDP at market prices($ billion) 1,006 1,097 1,196 1,303 1,420 1,548
Rate of growth of
GDP (%) 9 9 9 9 9 9
Bottom-upGCF in infra (as % of
GDP) 5.6 6.0 6.5 7.2 8.1 9.2
GCF in infra (US $
billion) 56 65 77 94 115 143 495 585Central (% of GDP) 2.6 2.7 2.9 3.1 3.4
State (% of GDP) 1.7 1.9 2.2 2.5 3.0
Private (% of GDP) 1.7 1.9 2.1 2.5 2.8
Eleventh Plan Period
Total (XI Plan)
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Financing pattern projected by the PC for XI Plan
It has been assumed that budgetary resources would be directed largely
towards rural infrastructure and north-east, leaving little room for funding
other infrastructure projects
(At current prices; $ billion)
Projectedinvestment
Budgetaryresources
Internal
resources/equity Debt
Center 231 57 52 122
States 180 122 17 40Private 174 0 52 122
Total projected
investment 585 179 122 284
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Who is financing and how, now (2006/07)?Also, PCs projection for 2011/12 at current prices.
2006/07 2011/12
% of GDP USD (bn) % of GDP USD (bn)
Central Government and its enterprises 2.1 21 @ 3.4 67
State Govts and their enterprises 2.3 23 $ 3.0 59Private sector 1.2 12 2.8 55
Total 5.6 56 9.2 181
Government borrowing 2.4 24 # 2.8 56
Internal Resources/ equity 1.2 12 1.9 39
Private sector 0.4 4 0.8 17
Public sector 0.8 8 1.1 22
Debt (required) 2.0 20 4.5 87
Domestic bank credit 0.8 8 2.0 40 (32%)
NBFCs 0.6 6 1.1 22 (37%)
Insurance companies 0.2 2 0.2 5 (16 %)
ECBs 0.4 4 0.5 9 (16 %)
Debt shortfall 0 0 0.5 11
According to PC, unfinanced gap is $11billion for 2011/12 and $ 45 billion for XI plan.
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What would this entail?
The recent trend of fiscal correction must continue
Higher populist spending can come only at the cost of infrastructure
investment in rural areas or economically depressed areas
Intermediation of domestic savings must be accelerated
Bulk of incremental savings must go to infrastructure
There are limits to bank exposure and by implication NBFCsexposure,to infrastructure
A fairly large part of private corporate savings must go toinfrastructure
There are indications of equity shortfall for private sector
If domestic savings cannot be adequately mobilized for infrastructuresector, additional access to foreign savings must be resorted to
But, can we?
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(as % of GDP)
FRBM targets
2005/06 2006/07
(RE)
2007/08
(BE)
(2008/09) 2009/10 20010/1
1
2011/1
2
Consolidated (Centre
plus States)
Revenue Deficit 2.7 2.1 1.2 0 0 0 0
Fiscal deficit 6.6 6.4 5.6 6 6 6 6
Capital exp + Netlending 3.9 4.3 4.4 6 6 6 6
Of which: on infra 2.0 2.3 2.3 2.7 2.8 2.9
Continued fiscal correction is critical.
The rest of capital expenditure is on defense (0.9% of GDP), housing, education,health and family welfare etc.
If fiscal correction ceases or reverses, capital expenditure on infrastructure
would suffer, unless non-infra capital expenditure is squeezed.
Financing through larger borrowing would crowd out private investment.
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But, maintaining the same pace of fiscal improvementas in recent past will be difficult
Actual fiscal consolidation has been overstated because of higher off-budget spending
Oil and food bonds, fertilizer subsidy and losses of state utilities amount to
about 2 percent of GDP.
There are additional risks to future fiscal consolidation
Recommendations of the Sixth Pay Commission
About half of fiscal deterioration between 1996/97 to 2001/02 can be
attributed to the Fifth Pay Commission (revenue deficit from 3.5 % to 7
% of GDP and consolidated fiscal deficit from 6.3 % to 9.9 %)
Special economic zone
Proliferation of SEZs would lead to significant revenue loss due to tax
holidays
395 have already been formally approved Economy may slow down
Most of the recent improvement in fiscal performance is due to revenue
growth
Populist spending may rise due to upcoming election
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Availability of domestic savings is not an issue.
Actual Projected
87/88 99/00 05/06 06/07 07/08 11/12
Gross Domestic Savings 20 25 32 34 35 39
of which
Household sector 16 21 22 23 23 24
Financial savings 8 11 12 12 12 13
Physical savings 8 11 11 11 11 11
Private Corporate sector 2 5 8 9 9 11
Public sector 3 -1 2 2 3 4
GDS has been accelerating and the trend is likely to continue, but the critical assumptionin this projection is that the entire incremental savings will be financial.
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Even with such assumption, intermediation of GDS will be achallenge.
Intermediation efforts
(Percent of GDP)
2006/07 20011/12
Total infrastructure spending 5.6 9.2
Gross domestic savings 30.0 39.0
o/w financial savings 23.0 28.0
Memo items
o/w ratio to be directed toinfrastructure (%) 24.3 32.8
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Especially, when bulk of long-term household savings areappropriated by the Government
Household Financial Savings (% of GDP)
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And when bulk of incremental savings must go toinfrastructure
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Infrastructure spending 5.6 6.0 6.5 7.2 8.1 9.2
Private infrastructure spending 1.2 1.7 1.9 2.1 2.5 2.8
Gross domestic (financial) savings 23 24 25 26 27 28
Incremental infra spending 0.4 0.5 0.7 0.9 1.0
Incremental private spending 0.5 0.2 0.2 0.4 0.3
Incremental financial savings 1.0 1.0 1.0 1.0 1.0
% share of infrastructure inincremental financial savings 40 50 70 90 100
% share of pr ivate infrastructurespending in incremental financialsavings 50 20 20 40 30
(% of GDP)
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Commercial banks credit to infrastructure has been growingrapidly
0
200
400
600
800
1,000
1,200
1,400
1,600
2001 2002 2003 2004 2005 2006 2007
Infrastructure Power Telecommunications Roads and ports
Rs billion
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But, can commercial banks meet the challenge in themedium term?
(at end of period)
Rs. Billion CAGR (%)
2000/01 2006/07 2011/12 2001/02 to
2006/07
2006/07 to
2011/12
Total credit outstanding 5114 19289 58865 25 25 (assumed)
Of which:
Outstanding credit to industrial sector 2188 6973 18086 21 21 (assumed)
Outstanding credit to infrastructure sector 113 1430 6305 53 34 (required)
Memo items:
Outstanding credit to infrastructure as a % of: (required)
Credit to industrial sector 5.2 20.5 34.8
Total credit 2.2 7.4 10.7
To attain the XI plan infra target set by the PC:
Note that not all commercial banks finance infrastructure; for those that do, the ratios are even higher
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Significant share of private sector retained earnings wouldhave to be directed into infrastructure
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Private sector equity requirement 0.4 0.5 0.6 0.6 0.7 0.8
Private corporate savings 9 9 10 10 11 11
o/w savings of privateindustrial sector 3.5 4.0
% share of equity requirement tototal corporate savings
4.4 5.6 6.0 6.3 6.6 7.7% share of equity requirements to
corporate savings in industrial
sector 11.0 21.0
(% of GDP)
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Faster development of corporate bond market isunavoidable
There are limits to banks exposure to infrastructure
NBFCs exposure to infrastructure is limited by banks growth potential
A banks exposure to a single NBFC should not exceed 5 % of banksnet worth and banks exposure to all NBFCs should be less than 40 %of banks net worth
NBFCs can and do have access to mutual funds, but such access istypically limited
MFs generally prefer short-term bonds and are extremely couponsensitive
Insurance companies typically prefer public sector NBFCs
All these imply that corporate bond market will have to be the mainstay ofinfrastructure development
Will be a source of long-term funds, allowing insurance companies,pension funds to play a bigger role
Developing a vibrant corporate bond market will take a few years
What do we do in the mean time?
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As concerns for external viability subside, ECBs havebegun to pick up
ECB flow s in India
-5
0
5
10
15
20
25
1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07
Gross Repayment Net
$ Billion
%External debt/ GDP
26
36 35 3330
26 23 23 23 21 22 21 20 17 16 15 16
0
10
20
30
40
50
1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002.-03 2004-05 2006-07
Long-term debt to GDP Short-term debt to GDP
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ECB was the biggest contributor to net capital flows in2006/07
Source: RBI's "Macroeconomic and Monetary Developments, First Quarter, 2007/8, J uly 2007
(US $billion) 2005/06 2006/07 Change
Current Account (net) -9.2 -9.6 -0.4
Capital Account (net) : 24.2 46.2 22.0
of which:
Foreign Direct Investment 4.7 8.4 3.7
Portfolio Investment 12.5 7.1 -5.4External Commercial Borrowing 2.7 16.1 13.4
Short-term Trade Credit 1.7 3.3 1.6
External Assistance 1.7 1.8 0.1
NRI Deposits 2.8 3.9 1.1
Addition to Reserves 15.1 36.6 21.5
INDIA'S Summary Balance of Payments
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ECB restrictions are impeding infrastructureinvestment
To reduce complications in macro management, Government has attempted to slowdown ECB flows by
Setting a very low limit ($ 20 mn) for domestic expenditure; prior RBI approval
Infrastructure generally has a low import intensity
All-in-cost ceiling has been reduced by 50-100 basis points
Makes it difficult to raise senior, subordinate debt, mezzanine financing,as the maximum permissible return is not considered enough to matchrisk
ECB is not allowed for integrated township
Need for prioritization has been recognized, but not implemented
Because of a lurking fear of arbitrage opportunities
Should ECBs into infra surge, there would be concerns about exchange risk
One option is to facilitate risk participation in infrastructure projects by foreigninvestors, which would create contingent liability for the latter
This could be accommodated within the overall limit for ECBs
May not solve the funding problem, but will help distribute risk more widely