Innovative Infrastructure Financing Mechanisms Required

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According to Infomerics Valuation and Rating Pvt Ltd, the noted SEBI-registered and RBI-accredited financial services credit rating Company, India’s infrastructure development has witnessed growing private sector participation in 2020-21. However, requirements of infrastructure have surged because of inadequate coverage and service level, poor service quality, institutional delinquencies and high administrative costs, among other factors. The Infomerics Valuation and Rating Pvt Ltd latest report has revealed that while infrastructure financing underwent a paradigm shift in the post-reforms period, there is still a fair distance to traverse. There are also issues of poor maintenance and cost recovery, unsustainable resource management practices, high investment needs and project costs and low priority accorded to certain basic services. The report notes that the evolving pattern of the level of basic infrastructure indicates accentuation of regional imbalances and associated spatially uneven patterns in infrastructure across States because of deeply ingrained historical, demographic, structural and institutional factors, infusion of large and continuous investment and divergent priority of different State Government. Challenges The Infomerics report states that given the control of a single bank/ financial institution in meeting all the credit requirements of a large project, syndication of lenders is usually resorted to. The issue of securing synergies in technology and infrastructure also provided an impetus to the rapid move to convergence. It is desirable to orchestrate the flow of the production cycle across a wide spectrum and provide an impetus to the growth process through increased private sector investment in infrastructure to broaden growth horizons. The report delineates the catalytic role of banks and financial institutions because debt constrains infrastructural projects. All variants of the basic approach, viz., Build-Operate-Transfer (BOT), Design-Build-Finance-Operate (DBFO), Build-Own-Operate-Transfer (BOOT), Build-Transfer-Lease-Operate (BTLO), Build-Own-Operate-Sell (BOOS), Lease-Refurbish-Operate-Transfer (LROT) stress the role of the government as a limited regulator in respect of safety, security, environment, etc. with the flexibility to developers regarding fixation and collection of tariff, suitable manpower policies, area development, operation and marketing of its facilities and finalisation of means of finance and structure of the project finance. The way ahead The Infomerics report recommends that banks and financial institutions have to become instrumental in mobilising domestic savings with innovative instruments - with differentiation in price-period-hedge against inflation, legal statutory relaxation, exit options and deepening of the secondary market to provide momentum to the growth process. Renewed focus on the role of banks and financial institutions in infrastructure financing could overcome the constraints of the development process, the report states. The incentives need to be changed, through commercial management, competition and stakeholder involvement by the two approaches of the Concession and the Structured Financing Option (SFO) to planning, development, management and financing of infrastructure projects. It further emphasizes the need to tap the capital market through an innovative credit rating system, launching of innovative borrowing instruments, development of an active secondary market in such securitised assets, as also greater rigour and market-oriented lending activities by these institutions. The report recommends “Putting in place and significantly upscaling innovative infrastructure financing mechanisms, restructuring and regulatory reform progresses, monitoring and evaluation systems to track unfolding developments and effect mid-course correction, where ever necessary”. It states “Dichotomy between social and private costs (and benefits) necessitates the selection of projects not justified based on the conventional and extended cost-benefit techniques to avoid both the monopolistic abuses of infrastructure operations and the vagaries of the market”.