Chillin' out till it needs to be funded
When Deepak Parekh retired from his long held position at the head of HDFC and HDFC Bank, the institutions did survive resiliently and his advised Satyam sale was followed by us among others with more interest. Consequently, when he comes back to marry using India’s sovereign forex reserves for its infrastructure financing gap and set up another institution for developing the financing limbs required to unburden commercial banks in India from the task of financing 30 year long infrastructure debt, it is likely a proven indian hokum by Montek Singh Ahluwalia to get desired currency in the global market.
According to the latest World Bank south Asia report, the average size of new private infrastructure projects has risen three fold from $211 million in 2006 to $638 million in 2009. In the first three quarters of 2009, India’s energy and transport sectors alone account for $26 bn of the $65 bn investments in the region.
India’s infrastructure gap requires $800 bn according to public estimates of a decade earlier while Goldman Sachs pegs this at a more realistic and even more daunting $2.8 trillion. Significantly while we have assumed private leadership because of the numbers involved since 2003 itself when we started setting up Infrastructure Finance vehicles in the budget and spending in INR trillions was instituted for the first time albeit with social infrastructure ( not counting education and health) Real traction in the infrastructure financing vehicles has begun with the first non coalition government at the center in a few years and now as Jahangir Aziz of JP Morgan also mentions in the mint quote from May, problems on the ground that cause delays in infrastructure programs need to be tackled head on.
India’s Infrastructure report card shows initial hiccups that caused roads, power and ports/airports programs to be significantly behind schedule. A significant tolerance is required in financial parameters at this stage to attract investment and maintain hopes for financial closure for such larger projects. India’s road projects are proceeding at 9kms a day and need to do double that, airport investments under JnNurm are not enough to set up greenfield projects in the emerging second tier int he nation’s urban infrastructure footprint and market capitalisation of public enterprises are likely to find lower ground as market reforms institute a public limit of min 25% of equity and corresponding issuance of nearly INR 1 Trillion floods markets
The $12 billion fund is likely set up as a trust under SEBI provisions according to recommendations presented by the Deepak Parekh led expert committee. The fund will bridge the immediate funding gap of INR 2 Trillion ( Rs 2 Lakh Crores ) in the 11th plan. the planning commission site houses the current status of all planned infrastructure projects on a running basis. $2bn in the fund will be sourced from our $180bn exchange reserves
Bank lending of Inr 2.7 trillion (mint report, o p bhatt) has unncessarily burdened banking resources with a maturity mismatch with the banks’ horizon of 5 years against the infra projects horizon of 15, 20 and even 30 years.
The fund is proposed to be funded buy DII to the extent of $5b at treasury ratesand include contributions of over a $1bn from sponsors like IDFC , IIFC, SBI and UTI along with a matching add on from IFC / ADB/World Bank World Bank has approved Infrastructure financing of $2b till date channeled thru commercial banks directly. With Sovereign funds contributing $2-3 billion the cost of funds for the new institutional access is likely to be lower than bank rates of 11-12% according to the committee’s recommendations. ECB financing can easily be sourced at 800-900 basis points and thus the final loans likely at 10% even lower than power Grid, Power Finance and REC financing currently to the tune of $5bn at less than 11%