Sucheta Dalal :Why have yet another infrastructure SPV?
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Column Topics » Financial Express » Why have yet another infrastructure SPV?
                       Previous           Next

Why have yet another infrastructure SPV?  

Nov 7, 2005

India needs to invest over $150 billion, very quickly, in order to beef up basic infrastructure and retain the economic growth momentum. All major international investors have flagged the lack of momentum on the infrastructure front as India’s biggest weakness. At a recent international conference, Roy Rodrigues, managing director of Bear Sterns, said, “India desperately needs investment in infrastructure, but that sector is struggling.” The problem, he said, is that every time the private sector thinks about investing in a public project, “the government wants to interfere and decide pricing. That’s when the private sector gets discouraged.”


Stephen Roach, chief economist of Morgan Stanley, thinks “India is on the cusp of something big,” but says, “Government has been stymied by the politics of inclusion on several fronts— namely on infrastructure and privatisation.” Even his bullishness about India is dampened by bad roads, airports and “poverty and human tragedy on a scale unlike anything I have ever seen— including that of rural China.”


Raghuram G Rajan, chief economist of the International Monetary Fund, identifies poor infrastructure as an immediate risk for the Indian economy. In an interview to a business magazine, he said, “Infrastructure in areas like roads and power has to grow now in anticipation of future demand.” He also said the government has an important role here as a facilitator. So what does the government do? It approves the setting up of yet another special purpose vehicle (SPV) called the India infrastructure Finance Company (IIFC) for core sector funding and providing long-term finance.


Finance minister P Chidambaram has a clear penchant for setting up new infrastructure institutions. In 1997, he created the Infrastructure Development Finance Corporation (IDFC) as a specialised infrastructure finance institution to attract private investment. It was also meant to provide long-term loans and guarantees at favourable terms that existing public and private financing institutions may not have been able to provide. The quasi-governmental finance was expected to mitigate political risk.


Even in 1997, it wasn’t quite clear why IDFC was set up when Infrastructure Leasing & Financial Services (IL&FS) was created exactly a decade earlier with a similar mandate. IL&FS was originally promoted as a joint venture between Central Bank of India, Unit Trust of India and Housing and Development Finance Corporation (HDFC) and later inducted a host of international institutions as shareholder. None of this impressed Mr Chidambaram when he set up IDFC, but for a long time after, the two infrastructure institutions (IDFC and IL&FS) had a common chairman in Deepak Parekh. Until its recent public issue and improved performance, IDFC’s fate was unclear.


• Lack of momentum on infrastructure is India’s old and biggest weakness

• But the problem has never been finance, but state meddling or bungling

• Announcing yet another funding institution doesn’t address core issues


Writing in these columns in April 2004, former RBI deputy governor SS Tarapore had aptly described IDFC’s situation as follows: “The whole issue of suitors lining up to merge with Infrastructure Development Finance Company (IDFC) is principally because of the Rs 50,000 crore infrastructure fund envisaged by the government. The issue of whether IDFC should be run as a private or a public sector organisation has its genesis in problems at the time of conception of the IDFC. The public sector had to dish out large amounts of money to set up the IDFC showpiece, but had little say in its running. Sooner or later, ugly issues were bound to come out in the open, as indeed they have done.”


By the time these issues were sorted, Mr Chidambaram had already announced the creation of yet another infrastructure SPV, the IIFC. It is to have an initial paid-up capital of Rs 10 crore, authorised capital of Rs 1,000 crore and a borrowing limit of Rs 10,000 crore in the current fiscal year.


Funnily enough, raising funds through appropriate financial structures have never really been the problem with India’s lack of infrastructure development. It has always been about political meddling, bureaucratic connivance and/or corruption. The combination of one or more of these factors led to unconscionable project clearances, huge project cost or escalations and deliberate destruction of viability in order to build a case for dubious privatisation. Other causes for delay are public protests regarding inflated project costs leading to high user charges, a go-by to environmental issues or shoddy handling of relief and rehabilitation of project-affected people. With frequent changes in state governments, several big-ticket projects have been caught in the cross-fire of political rivalry that is also predicated upon the suspicion of speed money collected in negotiating these. Consequently, key infrastructure projects are delayed, cancelled mid-stream, renegotiated or forced to languish.


The long list of large infrastructure initiatives caught in a quagmire include Enron’s infamous Dabhol Power Company (now showing signs of revival), the Bangalore airport, the Mysore-Bangalore expressway, the Mumbai-Pune expressway (handed over to the private sector on lucrative terms after it was deliberately turned unviable) and several other highway, expressway, port and power projects.


Funding problems faced by Indian infrastructure projects is mainly due to political risk. In fact, Indian debt market investors are a docile lot. Witness their unquestioning acceptance of key changes made to the Mumbai-Pune Expressway project and its toll plan.


Other important projects have languished due to pressure from vested interests (companies and builders). For instance, the upgradation of Mumbai’s public transport system, building a trans-harbour link to allow hinterland development or freeing Mumbai’s mill lands and Bombay Port land for public use is pending for decades. None of these issues can be addressed by setting up another infrastructure funding institution.


-- Sucheta Dalal