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Meeting the Funding Challenge
Meeting India’s 12th Five-year Plan target, which envisages a doubling of infrastructure spending from $500 billion to $1 trillion is indeed a daunting task in the current economic environment – especially considering at least 50% is expected to come from the private sector.
Economies in the Asian region, including India, are predicted to moderate, partly due to sluggish recovery forecast for major industrial economies. But even for this moderated growth to be realized, massive investments in infrastructure are inescapable. In this context, the sustainability of much-needed long term capital flow for infrastructure development is gaining increasing attention.
The announcements in the Union Budget (2012-2013) - ranging from expanding the scope of the Viability Gap Funding (VGF) Scheme, continuing emphasis on Infrastructure Debt Funds and doubling of the targets for raising tax-free bonds to deploy long-term financing for infrastructure projects - underscore this focus.
Multilateral Development Banks (MDBs) such as the Asian Development Bank (ADB) can play a critical role in helping economies in the region improve their investment climate, particularly to foster and catalyze investment by the private sector. ADB’s work with the private sector is not new to India. Given ADB’s overarching mandate to promote inclusive growth and development through poverty alleviation, there are a few ground rules that guide ADB’s private sector operations.
Firstly, ADB will not crowd out private commercial finance through any form of concessional financing, or through interventions in mature, commercially viable sectors that are already capable of attracting private capital on commercial terms. Its role is to support projects that are demonstrable, catalytic and replicable, where elements of perceived or persistent market gaps are inhibiting private investment. Risk-mitigation is provided in various forms, ranging from fixed rate local currency financing to hedge foreign currency exposure, providing long-term tenors on loans to enable remunerative equity returns, to various other forms of credit enhancements in the form of well-designed guarantee products.
Secondly, ADB supports and enhances clean technology and low carbon growth in line with its stated strategy of promoting environmentally sustainable growth through initiatives in renewable energy and energy efficiency.
Thirdly, ADB’s interventions require the highest standards in terms of safeguard compliance and corporate governance. While corporate India has no doubt already reached a high standard in the region on these counts, multilaterals such as ADB look for opportunities to guide fledgling corporations and small-medium enterprises (SMEs) to higher levels of governance, social protections and environmental safeguards.
ADB’s private sector operations in India thus far have been selective but distinctively pioneering.
Through an innovative 2004 public-private partnership, ADB supported the first liquefied natural gas terminal in the country through direct equity investments and local currency loans, at a time when India was in significant need to ensure its national energy security. ADB supported the very first private sector transmission project in the country, as well as the first ultra-mega power project in India, in a bid to demonstrate the commercial viability of such infrastructure projects and breed commercial financing. More recently, ADB’s private sector arm has supported various wind and solar energy initiatives.
ADB is also supporting the Bangalore Metro project, with innovative assistance structured around a financing mechanism akin to viability gap funding. In the financial sector, support of SMEs and clean energy is provided through intermediaries such as private equity and banks. Further support comes through guarantees aimed at shoring up the crisis-affected microfinance sector through risk sharing with local banks.
Given the magnitude of India’s infrastructure needs, and that of Asia as a whole, clearly multilaterals such as the ADB do not have the capital resources to meet even a small portion of this need through direct financing. Money has therefore ceased to be the core product on offer by MDBs. Indeed member countries are demanding that MDBs play a key role in knowledge dissemination and transaction structuring. Catalyzing investments through participation in well-structured projects, more as a partner in risk mitigation rather than as a plain-vanilla fund provider, has become the primary raison d’etre for ADB’s private sector operations, and more so in the Indian context.
Private sector activities of MDBs operate within a very narrow niche that has to be developmental, with poverty mitigation elements, while at the same time being commercially bankable. This is a challenge. Supporting renewable energy and green growth is presenting such an opportunity. Low cost affordable housing is another such area – the Budget announcement allowing external commercial borrowing in this segment will open up opportunities for MDBs to get more active with the private sector.
Going forward, MDBs such as the ADB can enhance their relevance in the Indian context by identifying ways by which some of the innovation that they seek to bring in is mainstreamed at a sectoral and policy level.