New instruments reqd to attract pvt sector in infra financing

Government should consider introducing innovative financial instruments for risk mitigation and more closely align the nature of infrastructure development with funding sources to encourage private sector investment in infrastructure, an ASSOCHAM-Deloitte study says.

In Twelfth Five Year plan, the Planning Commission is projecting an investment of Rs 51 lakh crore. About 53% of this is expected to be funded through budgetary support and rest will have to come from private sector funding, the study said.

"In this tight fiscal environment, private sector participation is seen as a means to bridge the funding gap. This is currently hampered by the significant challenges and risks faced by private sector.

"Due to change in BASEL III requirements and too much concentration of risk on their balance sheets, PSU banks may want to reduce their exposure to infrastructure funding in the near term. This would require encouragement of other funding sources (e.G. Insurance) and introduction of new instruments to accelerate flow of funding" the study said.

The government should therefore play a pivotal complementary role of a facilitator, enabler and regulator to allay down the apprehensions of the private sector, it added.

The study said non-banking financial companies (NBFCs)-Infrastructure Finance companies (IFC) should be permitted to access external commercial borrowing on liberal terms to make them globally competitive.

NBFCs-IFC funding needs are limited to bank finance largely and the tighter prudential limits on bank lending and sectoral caps limited to access commercial bank funds, Assocham Secretary General D S Rawat said while releasing the report.
     
Irda has set stringent guidelines towards investment in infrastructure bonds and statutory restrictions imposed by government such as minimum credit rating for debt instruments and minimum dividend payment record of seven years for equity are difficult conditions to meet for the private infrastructure projects, the study said.

Sale of unlisted projects is subject to capital gains tax which acts as a disincentive to most equity investors, it said.

"There is also a growing perception amongst the equity shareholders that the termination payments in the event of government agency defaults are not adequate in most concession agreements," it added.

The lack of derivative market and interest rate that implies that investors are unable to manage risks efficiently, as per the study.

External Commercial Borrowings (ECB) imposes all in cost ceiling that allows access only to highly rated companies.