An Overview of Infrastructure Financing in India and Future Options

Transcription

1 An Overview of Infrastructure Financing in India and Future Options November 17, 2007 Rajiv Lall, Ritu Anand and Nirmal Mohanty Infrastructure Development Finance Company Think Infrastructure. Think IDFC. 1

2 Introduction India s medium-term ambition Economic (9% growth per annum) Political (Inclusive growth) Infrastructure has a significant role to realize both. Government envisages a rise in infra spending from 5.6 % of GDP in 2006/07 to 9.2% in 2011/12 to enable 9 % GDP growth in XI Plan. Two sets of issues are impeding investment in infrastructure: - Sector governance (brief discussion) - Financing system (focus of discussion) Inability to meet the specific requirements of infrastructure projects 2

3 To support accelerated investment in infrastructure, sector governance must change. Two characteristics of recent approach to infrastructure investment Declining dependence on budgetary resources Increasing reliance on private participation Challenges for sector governance emerge from: reduced budgetary support User charge financed strategy needs to assure investors of adequate payment security (over a long period) and consumers of competitive tariff Higher private participation Level playing field, greater consistency and predictability of `rules of game and public consultations But political economy is inhibiting such change in governance Govt unwilling to give up its role as provider and regulator, although it is creating facilitating frameworks; for example: Newly created state-owned power utilities are acting as extension of Government `Open access is provided by Electricity Act, but States have been reluctant to phase it in Investment will be impeded if governance response is not appropriate 3

4 GCF in infrastructure: bottom-up estimates by PC (At prices) Year Total (XI Plan) Eleventh Plan Period GDP at market prices ($ billion) 1,006 1,097 1,196 1,303 1,420 1,548 Rate of growth of GDP (%) Bottom-up GCF in infra (as % of GDP) GCF in infra (US $ billion) Central (% of GDP) State (% of GDP) Private (% of GDP) /07 prices Current prices 4

5 Financing pattern projected by the PC for XI Plan (At current prices; $ billion) Projected investment Budgetary resources Internal resources/ equity Debt Center States Private Total projected investment It has been assumed that budgetary resources would be directed largely towards rural infrastructure and north-east, leaving little room for funding other infrastructure projects 5

6 Who is financing and how, now (2006/07)? Also, PC s projection for 2011/12 at current prices. 2006/ /12 % of GDP USD (bn) % of GDP USD (bn) Central Government and its enterprises State Govts and their enterprises $ Private sector Total Government borrowing # Internal Resources/ equity Private sector Public sector Debt (required) Domestic bank credit (32%) NBFCs (37%) Insurance companies (16 %) ECBs (16 %) Debt shortfall According to PC, unfinanced gap is $11billion for 2011/12 and $ 45 billion for XI plan. 6

7 What would this entail? The recent trend of fiscal correction must continue Higher populist spending can come only at the cost of infrastructure investment in rural areas or economically depressed areas Intermediation of domestic savings must be accelerated Bulk of incremental savings must go to infrastructure There are limits to bank exposure and by implication NBFCs exposure,to infrastructure A fairly large part of private corporate savings must go to infrastructure There are indications of equity shortfall for private sector If domestic savings cannot be adequately mobilized for infrastructure sector, additional access to foreign savings must be resorted to But, can we? 7

8 Continued fiscal correction is critical. Consolidated (Centre plus States) 2005/ /07 (RE) 2007/08 (BE) FRBM targets (2008/09) 2009/ /1 1 (as % of GDP) Revenue Deficit Fiscal deficit Capital exp + Net lending /1 2 Of which: on infra The rest of capital expenditure is on defense (0.9% of GDP), housing, education, health and family welfare etc. If fiscal correction ceases or reverses, capital expenditure on infrastructure would suffer, unless non-infra capital expenditure is squeezed. Financing through larger borrowing would crowd out private investment. 8

9 But, maintaining the same pace of fiscal improvement as in recent past will be difficult Actual fiscal consolidation has been overstated because of higher off-budget spending Oil and food bonds, fertilizer subsidy and losses of state utilities amount to about 2 percent of GDP. There are additional risks to future fiscal consolidation Recommendations of the Sixth Pay Commission About half of fiscal deterioration between 1996/97 to 2001/02 can be attributed to the Fifth Pay Commission (revenue deficit from 3.5 % to 7 % of GDP and consolidated fiscal deficit from 6.3 % to 9.9 %) Special economic zone Proliferation of SEZs would lead to significant revenue loss due to tax holidays 395 have already been formally approved Economy may slow down Most of the recent improvement in fiscal performance is due to revenue growth Populist spending may rise due to upcoming election 9

10 Availability of domestic savings is not an issue. Actual Projected 87/88 99/00 05/06 06/07 07/08 11/12 Gross Domestic Savings of which Household sector Financial savings Physical savings Private Corporate sector Public sector GDS has been accelerating and the trend is likely to continue, but the critical assumption in this projection is that the entire incremental savings will be financial. 10

11 Even with such assumption, intermediation of GDS will be a challenge. Intermediation efforts (Percent of GDP) 2006/ /12 Total infrastructure spending Gross domestic savings o/w financial savings Memo items o/w ratio to be directed to infrastructure (%)

12 Especially, when bulk of long-term household savings are appropriated by the Government Household Financial Savings (% of GDP) 12

13 And when bulk of incremental savings must go to infrastructure (% of GDP) Infrastructure spending Private infrastructure spending Gross domestic (financial) savings Incremental infra spending Incremental private spending Incremental financial savings % share of infrastructure in incremental financial savings % share of private infrastructure spending in incremental financial savings

14 Commercial banks credit to infrastructure has been growing rapidly 1,600 Rs billion 1,400 1,200 1, Infrastructure Pow er Telecommunications Roads and ports 14

15 But, can commercial banks meet the challenge in the medium term? To attain the XI plan infra target set by the PC: (at end of period) Rs. Billion CAGR (%) 2000/ / / /02 to 2006/ /07 to 2011/12 Total credit outstanding (assumed) Of which: Outstanding credit to industrial sector (assumed) Outstanding credit to infrastructure sector (required) Memo items: Outstanding credit to infrastructure as a % of: (required) Credit to industrial sector Total credit Note that not all commercial banks finance infrastructure; for those that do, the ratios are even higher 15

16 Significant share of private sector retained earnings would have to be directed into infrastructure (% of GDP) Private sector equity requirement Private corporate savings o/w savings of private industrial sector % share of equity requirement to total corporate savings % share of equity requirements to corporate savings in industrial sector

17 Faster development of corporate bond market is unavoidable There are limits to banks exposure to infrastructure NBFCs exposure to infrastructure is limited by banks growth potential A bank s exposure to a single NBFC should not exceed 5 % of bank s net worth and bank s exposure to all NBFCs should be less than 40 % of bank s net worth NBFCs can and do have access to mutual funds, but such access is typically limited MFs generally prefer short-term bonds and are extremely coupon sensitive Insurance companies typically prefer public sector NBFCs All these imply that corporate bond market will have to be the mainstay of infrastructure development Will be a source of long-term funds, allowing insurance companies, pension funds to play a bigger role Developing a vibrant corporate bond market will take a few years What do we do in the mean time? 17

18 As concerns for external viability subside, ECBs have begun to pick up $ Billion ECB flow s in India / / / / / / / / /07 Gross Repayment Net % External debt/ GDP Long-term debt to GDP Short-term debt to GDP 18

19 ECB was the biggest contributor to net capital flows in 2006/07 INDIA'S Summary Balance of Payments (US $billion) 2005/ /07 Change Current Account (net) Capital Account (net) : of which: Foreign Direct Investment Portfolio Investment External Commercial Borrowing Short-term Trade Credit External Assistance NRI Deposits Addition to Reserves Source: RBI's "Macroeconomic and Monetary Developments, First Quarter, 2007/8, July

20 ECB restrictions are impeding infrastructure investment To reduce complications in macro management, Government has attempted to slow down ECB flows by Setting a very low limit ($ 20 mn) for domestic expenditure; prior RBI approval Infrastructure generally has a low import intensity All-in-cost ceiling has been reduced by basis points Makes it difficult to raise senior, subordinate debt, mezzanine financing, as the maximum permissible return is not considered enough to match risk ECB is not allowed for integrated township Need for prioritization has been recognized, but not implemented Because of a lurking fear of arbitrage opportunities Should ECBs into infra surge, there would be concerns about exchange risk One option is to facilitate risk participation in infrastructure projects by foreign investors, which would create contingent liability for the latter This could be accommodated within the overall limit for ECBs May not solve the funding problem, but will help distribute risk more widely 20