INFRASTRACTURE FINANCE IN

INDIA
• Traditional economists are of the opinion that infrastructure is
the heart of the economy. Empirical data clearly shows that given a
choice, investors prefer to invest their money in countries whose
infrastructure is more developed. Hence, it can be said that rapid
infrastructure development is one of the most basic ways in which a
country can take advantage of economic opportunities. It’s therefore, no
surprise that countries around the world focus heavily on building
infrastructure.
• Developing countries like India have also echoed this sentiment as they
have also announced plans to spend billions of dollars in order to build
and upgrade their infrastructure. Hence, it can be said that infrastructure
and its financing is an important issue all across the world regardless of
whether the nation is developing or developed.
DEFINATION OF INFRASTRUCTURE
FINANCE
• The formal definitions of infrastructure financing are not very clear. Generally, in most
countries around the world, the government issues a list of industries that are to be given
infrastructure status. The financing of projects or companies involved in these sectors is
called infrastructure financing.
• However, this definition is more for the government’s internal operations. This definition is
used in order to provide tax breaks or subsidies that have been promised to the infrastructure
sector.
• However, there are certain shared characteristics amongst industries that are
classified as infrastructure all over the world. Some of these characteristics have been
mentioned below:
• Firstly, industries which are given infrastructure status are considered to be central to
the economy. This means that these industries provide the impetus for the rapid
growth and development of other industries as well. For instance, industries such as
roadways and railways enable faster movements of goods and services throughout the
country. This helps the manufacturers in the country become more competitive as
compared to other countries. The final result is an increase in exports. Other important
• Secondly, since these industries are considered to be of
strategic importance, too many private sector players are not
allowed to operate in them. This creates a monopolistic market
with very few players. As a result, investors are generally very
keen on investing in infrastructure opportunities. However, it
also needs to be understood that since these markets can be
considered to be monopolistic, they are also highly regulated.
Since there is only a handful of suppliers, the government fixes
the prices that can be charged

• Lastly, infrastructure assets are characterized by low risk and

stable cash flows. These projects are generally built in areas
where there is high demand. As a result, either the consumers
or the government are willing to pay a relatively stable cash
outflow for a long period of time.

• The bottom line is that the defining feature of infrastructure

financing is the sectors to which money is being lent. The
 TYPES OF INFRASTRUCTURE
FINANCE
• Infrastructure financing has various sub-divisions. These divisions are generally
based on the type of industry that the funds will actually be utilized in. The different
types of infrastructure financing have been listed below;
• Economic: infrastructure financing can be for purely economic reasons. For
instance, when a new port is built in a country, it enables more foreign trade. These
projects are generally funded using a public-private partnership. This is because
these projects have net positive value. Hence, the value created can be shared
between the government and the private parties. Economic infrastructure projects
provide benefits to the larger economy of a region instead of providing benefits only
to specific industries or people.
• Social: Infrastructure funding is also given to many institutions for a social cause.
For instance, several projects are undertaken to provide clean water to the people.
Similarly, projects are undertaken to provide healthcare and education services to
the people of a region. These projects are different because they have to be
undertaken regardless of the fact that they might have a negative net present value.
Hence, under other modes of financing, these projects
would be left out. However, when it comes to
infrastructure financing, the government does spend
funds on these projects even though there may not be
any immediate returns. Since these projects may have a
negative net present value, they are undertaken mostly
by the government.

• Commercial: Commercial projects are just like economic

projects. Except, these projects provide benefits to a set of
people that can be directly identified. For example, toll roads
and metro rail projects are considered to be commercial
infrastructure projects. They are funded by charging the people
who utilize the services.
The bottom line is that infrastructure financing is a vast field
that encompasses many industries. Also, the funding
models used here are slightly different since projects with
 INFRASTRUCTURE AS AN ASSET CLASS
• All financial instruments related to infrastructure financing have come common
characteristics regardless of whether they are debt-based, equity-based, or even
options. An investor needs to understand some of these characteristics before
deciding whether to put their hard-earned money in infrastructure financing.
• The defining characteristics of infrastructure as an asset class have been
listed down in this article.
• High Barriers to Entry:
• Infrastructure projects generally comprise of public works projects. As a result,
companies that bid for such projects are required to have a good amount of technical
expertise in the relevant field as well as deep pockets. In many parts of the world,
political connections are also required in order to land such projects. Hence, it would
be fair to say that there are high barriers to entry in this field. As a result, if a company
already has the approvals in place to implement an infrastructure project, investors
are generally keen on investing their money. This is because of the fact that such
projects have very little competition and hence provide stable, predictable cash flows.
• Inelastic Demand:
• Infrastructure projects are usually in industries where demand is very stable
and does not change drastically in relation to small changes in price. For
instance, people who pay for toll roads derive a lot of utility from their
usage. They are unlikely to stop using the facility because of a minor
increase in price. Also, in many cases, toll roads are the only option. Hence,
demand is totally inelastic. Other infrastructure projects such as dams,
power plants, ports, etc. also have an inelastic demand. This characteristic
makes infrastructure financing an attractive investment class.

• Economies of Scale:
• Infrastructure projects are generally undertaken on a large scale. As a
result, the company undertaking the project stands to benefit from
economies of scale. For instance, when a company lays down a telecom
network, it pays a fixed cost. The marginal cost of adding another
subscriber to the network is almost negligible. This factor, along with
economies of scale, means that investors stand to make hefty profits from
infrastructure projects. In most cases, infrastructure projects only face
limitations from the supply side. There is a significant amount of demand
for such projects. This makes infrastructure financing a preferred asset
class.
• Tax Benefits:

• Infrastructure financing is a priority for many countries worldwide. As a

result, governments try to make it easier for infra companies to raise
money. Hence, many tax breaks are provided to infrastructure companies all
over the world. So much so, that tax breaks have become a synonym for
infrastructure financing. These tax breaks are the reason that infrastructure-
related investments provide a higher yield to individuals as well as to
businesses.

• Long Gestation Period:

• Infrastructure projects are supposed to have a very long life. Roads, bridges,
dams, and railway lines last for several decades. In fact, in many cases,
infrastructure projects may take a decade or so to build. During the build
phase, the project does not generate any revenue. However, the project still
survives because of the long life of the debt which has been floated.
Infrastructure finance bonds generally have a very long duration. A lot of
times, perpetuities are used to finance such projects. Infrastructure projects
have a long life, stable cash flows, and limited ability to generate returns. It
is for this reason that many infrastructure companies use a lot of leverage in
order to accentuate the return on their investment.
• Low Sensitivity To Economic Swings:
• Lastly, one of the most important characteristics of infrastructure financing
is that it has a very low sensitivity to economic swings. In simple words, this
means that even if there is a recession, the number of people using
infrastructure projects, as well as the revenue generated from such
projects, remains more or less unchanged. This characteristic is very
important for many investors since it allows them to use infrastructure to
diversify their portfolio. Infrastructure financing can be accommodated in a
portfolio where equity and debt are already present. When equity rise, debt
falls, and vice versa. However, infrastructure-related instruments tend to
remain stable regardless of the rise and fall in other investments. As a
result, it can be used as a defensive financial instrument in a portfolio.

• The bottom line is that infrastructure financing has some very

attractive characteristics, which has helped it emerge as an
important alternative investment asset class. Most funds
across the world have some amount of money invested in
infrastructure assets.
 INFRASTRUCTURE FINANCE PROJECTS:
MAJOR SOURCES OF FUNDING

• It is a known fact that the world is in great need of infrastructure projects and,
therefore, infrastructure finance. Developing countries need to build their
infrastructure for the first time. This needs to be done in order to attract more
investments. However, even developed countries need to build more infrastructure
projects. This is because the population in the developed countries is growing
steadily. As a result, the infrastructure which was adequate a few years earlier is no
longer adequate. Also, normal wear and tear make it necessary to build infrastructure
projects.
• The bottom line is that infrastructure projects all over the world need a lot of funding.
It is estimated that more than $96 trillion is required to fund infrastructure projects
by the year 2030. At present, the annual budget available for infrastructure
funding worldwide is close to $2.5 trillion to $3 trillion. However, the actual
amount of funds needed is more than double the available amount. Also, the problem
is that most of this shortfall of funds exists in low and middle-income countries.
• Funding of this magnitude cannot be provided by anyone’s source alone. This is
the reason that infrastructure needs to be funded by several sources having
deep pockets. Some of the most common sources of infrastructure finance have
been listed below:

• Public Finance

• Government funding is one of the biggest sources of funding for infrastructure

finance. Tax dollars collected all over the world are spent in huge numbers on
creating infrastructure. In general, countries spend anywhere between 5% to
14% of their GDP on developing as well as maintaining infrastructure. A lot of
this money is spent on financially unviable projects which have social value for
the community.

• In many cases, the government does engage the private sector to execute the
project on its behalf. However, this may be done to increase the efficiency of the
project. The private sector only brings in the necessary expertise to deliver the
project on time. In return, the government provides all the funding when
developmental milestones are completed. In essence, governments worldwide
use the services of the private sector as subcontractors.

• However, it needs to be understood that infrastructure finance projects funded

by the government are notorious for corruption. Since the taxpayer is paying the
bill, a lot of the time, the development charges are highly inflated, and all the
• Supra National Financial Institutions
• Supranational bodies such as World Bank, International Monetary Fund, Asian
Development Bank, etc. are also important sources of finance for infrastructure
projects. However, such organizations tend to only fund projects which are financially
viable. As a result, urban projects like metro rails, bridges, flyovers, etc. tend to get
funded by these institutions. The internal rate of return (IRR) required by these
financial institutions is generally lower as compared to other private sector
institutions.
• Institutions like the World Bank and the Asian Development Bank also provide other
services to enable the better execution of infrastructure projects. This means that
even if they do not directly fund a project, they try to add value by providing advisory
services such as loan guarantees, advisory services for the creation of suitable
policies, etc. In many cases, these institutions also provide treasury services to
infrastructure projects. This is done to enable optimal utilization of funds.
• Private Finance
• Governments all over the world are desperately seeking the intervention of private
money to help fill the funding gap being faced for infrastructure projects. As a result,
many private mutual funds have been set up for this purpose. Governments try to
make these investments more attractive by providing tax breaks to individuals who
invest their money in such projects. A wide variety of financial instruments (both debt
as well as equity) are being used to help channelize the savings of the general public
towards infrastructure projects. Attempts are also being made to woo institutional
investors such as insurance companies and pension funds to increase the amount of
funding available.
• Public-Private Partnership

• The public-private partnership model is also widely used in infrastructure

funding. This model works differently than public funding. Here, instead of
the government using its money for the initial outlay, the private sector
does so.
• The idea is to create a partnership, where the government brings in land
and other resources, wherein the private party brings in technical expertise.
The private party then has certain rights over the asset it has helped
developed.
• For some years, the government allows the private party to collect money in
order to generate revenue and payback its investment plus a reasonable
amount of profit. Then the asset is finally given back to the government,
which can decide whether or not they want to continue collecting revenue
for the upkeep of the project.
• The only problem with this model is that it can only be used to raise funds
when the underlying project is extremely viable i.e., provides an IRR that is
sought after by private investors. Otherwise, private investors will simply
give it a pass.
• The simple fact is that extremely large sums of money are required for
infrastructure projects. One source of funding cannot really help fulfill the
 RISKS FACED BY INFRASTRUCTURE
PROJECTS IN EMERGING MARKETS
• Currency Fluctuation Risks
• Emerging markets tend to have underdeveloped banking as well as equity markets.
As a result, they cannot provide all the capital which may be needed for the
development of infrastructure projects. As a result, there is a need to involve
foreign investors to fund the project.
• The problem is that foreign investors generally prefer to invest in an international
currency such as the dollar or the Euro. However, in most emerging markets, the
cash flows are in local currencies. This mismatch often signifies a huge risk for the
investors. Since the projects are long term in nature, hedging is also not a viable
option. One way to deal with the situation is to involve export credit guarantee
institutions of other nations.
• For instance, countries like China do invest in projects and accept the local
currency for payment. However, they insist that the contracts for the project be
given to Chinese firms. In many cases, this raises costs and hence, may not be the
best option.
• Political Risks
• Political risks are always present in each and every infrastructure project. However,
when it comes to emerging markets, these risks are amplified. In many countries,
governments or even rebels disrupt the proceedings of several projects. The disruption
could be as simple as not granting permissions for the project. In many severe cases,
entire projects have been expropriated by hostile foreign governments.
• There are many corrupt governments in developing countries that know that once the
infrastructure project is started, the stakes become very high. The projects cannot
simply be uprooted and moved to another location. Hence, such governments try to
take advantage of taking maximum money out of infrastructure companies in the form
of higher taxes or even bribes! Mechanisms such as investment treaties have been
created to mitigate political risk. However, they too seem to have limited applicability.

• Capital Controls
• Emerging markets are also known for imposing capital controls. This means that
taking the money inside many emerging economies is easy. However, when it comes
to taking the money back out of the economy, there may be several restrictions.
• Companies may not be able to return the profits earned to their parent company. This
means that the investment opportunities for the cash flow generated are also limited.
Limited options translate into lower returns and end up scaring away international
investors.
• Also, the problem is that in most cases, capital controls are only put up just before the
situation is about to get out of hand. For instance, in Greece, capital controls were
stipulated days before the country saw a severe economic downturn.
• Opaque Policies
• Emerging markets are known to have opaque policies related to infrastructure
development. Sometimes political parties keep the policies opaque and muddled up
on purpose. This makes it difficult for companies to comply with the norms. Then,
they ask for bribes to overlook the non-compliance. Companies that pay bribes are
allowed to work, whereas those that do not pay strict legal action. Apart from being
unethical, bribes are also known for having a severe financial impact. Many studies
have shown that an opaque policy environment is equivalent to a 33% tax on the
infrastructure project!

• Legal Risks
• Each infrastructure projects is a cobweb of several interdependent contracts. It
would, therefore, be safe to say that the success or failure of a project depends upon
the ability of the infrastructure company to execute the contracts. The problem is
that in emerging markets, the legal system does not function efficiently. Hence, there
is no downside for many rogue parties if they do not honor their contracts.
• The aggrieved parties do not have too many legal options. This is because the legal
options may be complicated, time-consuming as well as expensive. Hence, the odds
may be stacked against the infrastructure company. This obviously is a huge
challenge since no investor wants to end up in a scenario where they have agreed to
deliver a project with stringent deadlines but are not able to enforce their partners to
hold up their end of the bargain.
• Legal issues can cause severe cash flow problems as it is not common for the
payments to be held up because of quality issues or because a certain milestone was
..THANK YOU..