Almost every week there is an article or some minister or a senior bureaucrat saying how we will need trillions of Rupees over the next decade to finance India's infrastructure ( used in a broad sense including power, toll roads, bridges, rail roads ) and how difficult it is to obtain the funding.
Having seen the Asian economies grow in the eighties and nineties and being involved directly or indirectly in the financing of some these projects I feel that the persons making these statements do not really know what they are talking about. The issue is not obtaining the money. The world is flush with liquidity.
At this stage however let me digress a little at this stage and take you back over a hundred years when American railroads where being built. At that time, Europe and particularly the United Kingdom was the center of the world. Banks and investors in Europe financed the construction of the rail road systems. I also have bonds issued by the Kingdom of Siam and China during the late eighteen hundreds. I have no idea whether all of them were repaid or not. With the world now more linked together and with liquidity pools in the United States, Europe, the Middle East and now Asia and with markets being more open, funding is not the issue. The issue is transparency.
For any project financing , whether it is infrastructure or offshore production facilities or a real estate project, you have to recognize that they are capital intensive and that they are long tailed. The basic risk factors you have to take into considerations are as follows :
1. The reputation and financial standing of the sponsors of the project
2. The reputation and financial standing of the contractor
3. The political , regulatory and environmental issues
4. The reputation and financial standing of the off taker or the end user market
5. The technology used and the reputation of the firm providing it
If you are able to tick off all of the above , you will have no shortage of funding.
I read a lot about how capital markets, particularly the bond markets, should be developed to finance infrastructure projects. While this attempt has been moderately successful in a small way, keep in mind that bond issues have to be rated. How do you rate a greenfield project, particularly in emerging market countries including India, when you know that the odds are very much in favour of the project not being completed on time, or it being over budget or running into political turmoil. In Asia the only country which seems to have had some success in financing project financing through the bond market is Malaysia. I take my hats off to the local rating agencies there in their ability to rate these projects.However if you look globally in terms of infrastructure projects financed through the bond markets, you will see that the number is extremely modest.
For the bond markets to be involved in the financing of infrastructure projects it will probably be in the form of a take out financing when the project has been completed and it starts generating cash. If you do want to go to the bond market right from the beginning the banks or the government agencies have to provide some sort of interim financing or provide a guarantee or a put which allows the investors to put the bonds in case the projects are not completed in the period agreed on with a allowed grace period. Also the initial proceeds of the bonds will have to be placed in a escrow account and released gradually. This will of course add to the cost of financing as the borrower will have to start paying financing from day one.
Obtaining financing from banks is probably a better approach since banks have the experience in project financing and the borrower has to pay only a commitment fee rather than full interest on borrowings. Banks are better able to deal with restructurings then bond investors in case the project runs into genuine difficulties.
If the government wants to obtain overseas bank or institutional financing for infrastructure it needs to set up a legal entity which provides guarantees until the project is completed . The legal entity needs to have a very transparent set of guidelines and a strict list of approved consultants, contractors, and water tight contracts which imposes penalties on firms if deadlines are not met. It also needs to ensure that there is single window for all government approvals ( including environmental and other regulatory approvals) which are binding even if the state government changes, to avoid a project being stopped mid-way. It needs to ensure that the Equator guidelines are followed.
Finally the bank financing can be supplemented with financing from the multilateral agencies and the export credit financing agencies if substantial equipment is imported from a particular agency.
With the above in place there should be no problem with obtaining financing for projects in India.
Having seen the Asian economies grow in the eighties and nineties and being involved directly or indirectly in the financing of some these projects I feel that the persons making these statements do not really know what they are talking about. The issue is not obtaining the money. The world is flush with liquidity.
At this stage however let me digress a little at this stage and take you back over a hundred years when American railroads where being built. At that time, Europe and particularly the United Kingdom was the center of the world. Banks and investors in Europe financed the construction of the rail road systems. I also have bonds issued by the Kingdom of Siam and China during the late eighteen hundreds. I have no idea whether all of them were repaid or not. With the world now more linked together and with liquidity pools in the United States, Europe, the Middle East and now Asia and with markets being more open, funding is not the issue. The issue is transparency.
For any project financing , whether it is infrastructure or offshore production facilities or a real estate project, you have to recognize that they are capital intensive and that they are long tailed. The basic risk factors you have to take into considerations are as follows :
1. The reputation and financial standing of the sponsors of the project
2. The reputation and financial standing of the contractor
3. The political , regulatory and environmental issues
4. The reputation and financial standing of the off taker or the end user market
5. The technology used and the reputation of the firm providing it
If you are able to tick off all of the above , you will have no shortage of funding.
I read a lot about how capital markets, particularly the bond markets, should be developed to finance infrastructure projects. While this attempt has been moderately successful in a small way, keep in mind that bond issues have to be rated. How do you rate a greenfield project, particularly in emerging market countries including India, when you know that the odds are very much in favour of the project not being completed on time, or it being over budget or running into political turmoil. In Asia the only country which seems to have had some success in financing project financing through the bond market is Malaysia. I take my hats off to the local rating agencies there in their ability to rate these projects.However if you look globally in terms of infrastructure projects financed through the bond markets, you will see that the number is extremely modest.
For the bond markets to be involved in the financing of infrastructure projects it will probably be in the form of a take out financing when the project has been completed and it starts generating cash. If you do want to go to the bond market right from the beginning the banks or the government agencies have to provide some sort of interim financing or provide a guarantee or a put which allows the investors to put the bonds in case the projects are not completed in the period agreed on with a allowed grace period. Also the initial proceeds of the bonds will have to be placed in a escrow account and released gradually. This will of course add to the cost of financing as the borrower will have to start paying financing from day one.
Obtaining financing from banks is probably a better approach since banks have the experience in project financing and the borrower has to pay only a commitment fee rather than full interest on borrowings. Banks are better able to deal with restructurings then bond investors in case the project runs into genuine difficulties.
If the government wants to obtain overseas bank or institutional financing for infrastructure it needs to set up a legal entity which provides guarantees until the project is completed . The legal entity needs to have a very transparent set of guidelines and a strict list of approved consultants, contractors, and water tight contracts which imposes penalties on firms if deadlines are not met. It also needs to ensure that there is single window for all government approvals ( including environmental and other regulatory approvals) which are binding even if the state government changes, to avoid a project being stopped mid-way. It needs to ensure that the Equator guidelines are followed.
Finally the bank financing can be supplemented with financing from the multilateral agencies and the export credit financing agencies if substantial equipment is imported from a particular agency.
With the above in place there should be no problem with obtaining financing for projects in India.
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