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Funding problems for big scale 12th Plan infrastructure spending
The Planning Commission expects the private sector to contribute 50% of 12th Plan infrastructure spending
target. Based on our analysis on order inflows in the next two years, road and power segments, in particular,
are likely to witness a sharp increase in private sector investment. We have assumed that private sector
investment will be 70% debt-funded and 30% equity-funded and 25% slippage in US$1trn infrastructure
spending target under the 12 th Plan. Based on this approach, the private sector will raise Rs2.4trn of debt and
it will be required to pump in Rs1trn as equity per annum. Market has concerns that despite rising bank credit
to infrastructure projects, banks are unable to fund such projects to the extent of over 50% of their requirement
and thereby delay financial closure. We agree with the market’s concerns that bank credit is unable to fund the
projects. However, we believe the recent reforms related to the debt market and financing of infrastructure
projects would ease raising debt for funding the projects.
Recent reforms which will ease project funding:
IIFCL take-out financing is a major development as it addresses the banking sector’s asset-liability
duration mismatch in lending to infrastructure companies.
Government has announced the setting up of Infrastructure Debt Funds (IDFs) with an initial corpus of
US$10bn, which will attract long-term offshore funds at a lower interest rate,
Introduced tax-free infrastructure bonds - tax exemption of an additional Rs20,000 for individuals.
Government’s proposal to classify loans to the infrastructure sector as secured lending, which will
increase the flow of funds towards the sector.
IIFCL allows raising Rs400bn through tax-free bonds.
Government and IIFCL to refinance 60% of commercial banks’ loans for PPP (public-private partnership)
projects over the next 15-18 months
RBI has introduced a new category of infrastructure financing company with relaxed borrowing limits and
lower risk weight for borrowing from banks.
Finance ministry proposes to allow private sector firms to issue long-term infrastructure bonds to raise
funds for investment in the infrastructure sector.
Infrastructure bonds can be held to maturity and need not be mark-to-market.
RBI has changed the classification of build-operate-transfer (BOT) projects to secure from unsecured.
Government’s expert committee proposes India Infrastructure Fund to refinance bank lending to
infrastructure projects where construction has been completed.
RBI allows take-out financing through ECBs for refinancing of rupee loans availed from domestic banks.
Exhibit 51: Bank credit to power, road and port projects (% of total lending to industry)
(x)
25
23.3
20
15
11.1
14.4
16.9 16.9
18.2
19.9
10
5
5.0
6.5
8.6
0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Source: RBI
22 Infrastructure Sector