The Centre intends to set up a US$10-billion infra debt fund to finance infrastructure projects across the country  In a major push to the infrastructure sector, the Planning Commission has proposed the Finance Ministry to allow infra firms to raise funds from insurance companies and pension funds. The recommendation has also drawn support from the Road Ministry and the National Highways Authority of India (NHAI). The Finance Ministry is yet to respond on this. The idea is to meet long-term financing requirements for infrastructure projects, especially for special purpose vehicles (SPVs) that are very common in highway projects.
Infrastructure projects usually require long-term financing, however commercial banks do not provide long-term loans primarily due to unavailability of tangible security in case of a default. Therefore, the proposal mentions that infra firms need to assure lenders repayment of a certain portion of the fund borrowed by their SPVs, thereby reducing risks for lenders.
Welcoming the recommendation of the Planning Commission, Vikesh Mehta, partner (specialist advisory services) at Grant Thornton, a global business consulting firm, says, “There’s a lot more to infrastructure financing. A fair amount of money is already available to infra firms, whether from capital markets, private equity or long-term debt from institutions like IIFCL[i]. However, the bigger problem seems to be dealing with project structures and risk allocation, particularly for those which are implemented using the PPP route. These have a bearing on the financial viability of the SPV as well as security that the borrower can offer to financers, both of which are critical factors from an investor’s point of view. In short, implementation of the proposal by itself cannot solve infra financing problems.”
Mr Mehta further said to a TJCD correspondent, “At present, under traditional financing structures, parent companies are required to provide corporate guarantees to lenders at the SPV level, which essentially means that in the event of default, the lender has recourse to the parent company that may have to pay a portion or the entire fund borrowed. To that extent, even under the new scenario, parent companies may have to repay a portion of the fund borrowed.
When asked whether this kind of corporate support would complicate borrowing procedures delaying project execution, Mr Mehta said, “There are a number of factors that impact project execution and financial closure is one of them. Like anything new, this will also evolve over time and some standard borrowing structures will come into practice. Until such time, there will be hiccups but in the long run it will have a positive impact.”
Infra debt fund
In another attempt to ease funding of infrastructure projects across India, the Centre intends to set up a US$10-billion infra debt fund. For this, the government has formed a 15-member committee led by Deepak Parekh, who was the former chairman of the reputed HDFC Bank. Recently, the committee has proposed to create a debt fund through low-cost, long-term capital, which would be mainly used to refinance infra projects under the PPP[ii] model.
Commenting on the Parekh committee report, Planning Commission deputy chairman Montek Singh Ahluwalia said that the Finance Ministry wants views from various stakeholders on the committee’s aforementioned proposal. Mr Ahluwalia further added that the Ministry has invited necessary modifications in the regulatory system, since such debt funds require relaxations from RBI[iii] and SEBI[iv].
To help India achieve an annual GDP growth rate of more than 9%, notable improvement in the infrastructure segment is imperative, admitted Mr Ahluwalia. However, financing infrastructure projects has been a major constraint and so Ahluwalia stressed the need for active participation from private players over the foreseeable future.
Jeeta Bandopadhyay
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