Mumbai: India's hopes of launching much-needed road, port and power projects may be deflated by a funding squeeze as government finances are constrained, long-term domestic money is scarce and battered overseas investors and lenders watch from the sidelines.
If starved of the spending, India's overburdened infrastructure is bound to hinder the country's efforts to return to an economic growth rate of 9 percent a year and hurt its goal to become the fastest growing major economy in the world in 2010.
Asia's third-biggest economy needs $500 billion for its infrastructure over the five years to 2012, the government has estimated. About 30 percent of that is expected from private funds, as the government tries to contain a widening fiscal deficit.
Developers tend to raise equity financing through founders or overseas investors and borrow funds for short to medium terms from financial institutions. But money flow is tight these days.
"We have to seek alternative ways to raise capital," said Jai Mavani, head of infrastructure at consultancy KPMG, adding that the big pool of domestic savings must be tapped. "We have some of the highest savings rates in the world," Mavani said.
According to some estimates, household savings in India in 2007/08 was around Rs 7.3 trillion ($150 billion), from a population of 1.1 billion. Most of that is in low-risk bank deposits, insurance policies and pension funds, all of which are heavily regulated.
Infrastructure projects require capital that is willing to be committed for decades, and projects can carry substantial execution and financial risk.
"It's a new animal," said Nitin Bhasin, analyst, Nobel Group, an equity advisory firm for institutional investors. "The money is in the system but regulations have to be made more conducive."
The government has announced extra spending of Rs 200 billion and cut tax rates as part of stimulus packages to boost growth, which widened the fiscal deficit to 6.2 percent of GDP in FY09 against the previously targeted 2.5 percent.
Neither India's banking system nor the domestic institutions have the money to finance India's infrastructure needs, and corporates want to tap retail money.
The firms want pension funds to invest up to 15 percent of their money in infrastructure projects and await cues from the approaching budget to be announced on July 6.
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Bankers say the foreign currency market is unwilling to extend long-term funds. Meanwhile, there is a reluctance among investors to pick up long-maturity bonds, such as those issued by infrastructure companies, in an illiquid bond market, on expectations yields will rise later.
"Ideally, you would expect the bond market to be the best vehicle for meeting infrastructure investment requirements. You get access to long duration money and all infrastructure assets are long gestation," said S. Nanda Kumar, a Fitch Ratings analyst.
Since a lot of India's infrastructure projects are in the early phases of construction, their assigned ratings are too low for bond market investors, such as banks, pension and mutual funds and insurance companies, to be able to invest in them.
The low ratings reflect the risks infrastructure projects pose, including construction and completion, high indebtedness and susceptibility to cash-flow volatility.
"There has to be innovation in terms of financing," said Amitabh Das Mundhra, director of Simplex Infrastructures Ltd, arguing that the risk factor declines over an asset's life. Simplex builds roads, power utilities and sewage systems.
"It's not a liquidity issue. It's the viability issue people need to address," he said.
Under contract terms for newer projects, companies are responsible for design, execution and funding. In return, they have control over the asset for a few decades to reap rewards, before handing it back to the government, the original owner.
Builders want longer concession periods and better terms to attract debt and equity financing for 15-30 years' tenure that infrastructure favours and is especially needed for the latest round of bidding for large build-operate and transfer (BoT) projects.
Debt-burdened developers have been looking to the equity markets to raise funds, although many market insiders say the window for equity-raising is open only to the strongest players.
GMR Infrastructure, a stakeholder in New Delhi's international airport, one of the busiest in the country, managed to attract just over half the $1 billion it is hoping to raise during an investor roadshow this month, banking sources said.
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So far, private equity firms have not put any money into construction this year and invested just $160 million in 2008, Thomson Reuters data showed.
"The government has put a lot of restrictions and that, sometimes, the private equity funds and (foreign) pension funds are not comfortable with," said Vishwas Udgirkar, executive director at PricewaterhouseCoopers India.
He said infrastructure developers will be constrained until they can find more sources of funding.
"Unless and until they can tap more avenues for raising equity, it's difficult for them to go after more projects," he said.
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