Poor infrastructure is India's "Achilles' heel" which is estimated to cost India 3 4% of lost gross domestic product (GDP) a year. India needs to increase its spending on infrastructure from 4-5% to 9% of GDP to achieve the growth projection of 9% during the 11th (FY2007 FY2012) Five-Year Plan (FYP). With higher growth targets and a rising population, even maintaining current levels of infrastructure will require a staggering increase in investment. The total investment required is estimated at about $475 billion during the 11th FYP.
Public sector has been the main provider of infrastructure in India. However, public financing alone will not be able to generate the needed level of investment ($475 billion). Accordingly, the Government's priorities for bridging the infrastructure deficit includes (i) revising policies and regulations for enhancing private sector participation (PSP) in infrastructure development including through PPPs, (ii) strengthening the capacity at all levels for promoting PPPs, and (iii) enabling arrangements for bridging the enormous deficit in infrastructure financing especially for long-term funds through all possible sources. Corresponding reform measures are underway.
Infrastructure sector reforms are enhancing the enabling environment and encouraging participation of PSP from domestic and international sources. In addition, significant efforts are ongoing for mainstreaming PPPs in the states and in central line ministries. While a paradigm shift from public financing to PPP modality requires time, these measures have already facilitated the application of PPP modality in sectors such as road and power.
India has also witnessed a visible shift in financial sector policies since the 1990s. The reform measures have led to increased allocative efficiency of the financial system brought about by a reduction in intermediation costs, enhanced competition, and increased diversity of products and services. Notwithstanding these, the infrastructure finance market in India is largely characterized with inadequate flow of long-term funds. In this context, the Government is pursuing reforms in contractual savings (pensions and insurance) and the corporate debt market.
Considering several interlocking factors including policy and regulatory inadequacies in infrastructure and financial sectors, the impact of the ongoing reforms will only be felt over the medium- to long-term and as a result, the already significant gap in infrastructure financing will further increase. These concerns were extensively discussed within the Government as well as with financial market experts and international institutions for framing innovative responses consistent with the PSP and PPP agenda.
Among the options, establishing IIFCL to provide the much needed long-term debt at commercial terms specifically for promoting PPPs was considered important in view of the limited availability of long term debt for infrastructure financing. Central to the Government's PPP development strategy, IIFCL's operating paradigm is guided by the Scheme approved by the Government's Committee on Infrastructure chaired by the prime minister.
The Government has also designated IIFCL as the debt manager of a $3 billion debt fund of the $5 billion India Infrastructure Financing Initiative. IIFCL, in partnership with Blackstone Group, CitiGroup, and Infrastructure Development Finance Company are the initial investors in the $2 billion equity fund of the India Infrastructure Financing Initiative. Further, IIFCL and 3i Group plc. have entered into a strategic partnership for equity and long-term debt financing for projects in power, port, airport, and road sectors. IIFCL is also expected to be the lead agency for utilizing India's foreign exchange reserves for infrastructure financing. For this purpose, IIFCL is likely to establish two offshore special purpose vehicles.
The proposed India Infrastructure Project Financing Facility (the Facility) will directly support the Government's infrastructure development agenda by enhancing the availability of the much needed long-term funds for infrastructure financing. With ADB's assistance through the Facility, IIFCL will provide funds at commercial terms with over 20-years maturity for infrastructure subprojects which is currently not being provided by the market.
The Facility is an integral part of the ADB's sector strategy and complements ADB's parallel initiatives in contractual savings, corporate bonds, PPPs, and infrastructure development, all of which contribute to creating an enabling environment for infrastructure development in India.