2.2. Issues in Infrastructure Financing

♤ Funding Gap - Funding Gap is the most important issue that we face on this front. The slowdown in the economy has further aggravated this funding gap in the infrastructure sector.

♤ Fiscal Burden - Almost half of the total investment in the infrastructure sector was done by the Government through budget allocations. But the Government funds have competing demands, such as, education, health, employment generation, among others.

♤ Asset-Liability Mismatch of Commercial Banks - After the budgetary support, next in line for financing infrastructure were funds from the commercial banking sector. However, it is a well-known fact that these are institutions that primarily leverage on short-term liabilities and, as such, their ability to extend long-term loans to the infrastructure sector is limited. This is because, by doing so they get into serious asset-liability mismatches.

♤ Investment Obligations of Insurance and Pension Funds - From the point of view of asset- liability mismatches, insurance and pension funds are one of the best suited institutions to invest in the infrastructure sector. This is because, in contrast to the commercial banking sector, these institutions leverage on long-term liabilities. However, they are constrained by their obligation to invest a substantial portion of their funds in Government securities. Of course, in a way, this facilitates the financing of gross fiscal deficit of the Central Government and hence enables the Central Government to make more investments. However, this limits the direct investment of these institutions in the infrastructure sector

♤ Need for an Efficient and Vibrant Corporate Bond Market - An active corporate bond market can facilitate long-term funding for the infrastructure sector. However, despite the various initiatives taken by the Reserve Bank, Securities & Exchange Board of India and Government of India, the corporate bond market is still a long way to go in providing adequate financing to the infrastructure sector in India.

♤ Developing Municipal Bond Market for Financing Urban Infrastructure -For large scale financing urban infrastructure which is assuming critical importance in the context of rapid urbanization, conventional fiscal transfers to the urban local bodies or municipals from governments are no longer considered sufficient.

As a result, there have been some earnest experimentations by these bodies to tap unconventional methods of financing such as public private partnerships (PPPs), utilizing urban assets more productively, accessing carbon credits, etc. but then these do not address the financing needs. One possible way of addressing the problem is developing a municipal bond market.

♤ Insufficiency of User Charges - It is a well-known fact that a large part of the infrastructure sector in India (especially irrigation, water supply, urban sanitation, and state road transport) is not amenable to commercialization for various reasons, such as, regulatory, political and legal constraints in the real sector. Due to this, Government is not in a position to levy sufficient user charges on these services. The insufficiency of user charges on infrastructure projects negatively affect the servicing of the infrastructure loans. Generally, such loans are taken on a non-recourse basis and are highly dependent on cash flows.

Hence, levy and collection of appropriate user charges becomes essential for financial viability of the projects.

♤ Legal and Procedural Issues - Infrastructure development involves long gestation periods, and also many legal and procedural issues. The problems related to infrastructure development range from those relating to land acquisition for the infrastructure project to environmental clearances for the project. Many a times there are legal issues involved in it and these increase procedural delays.