The IIPFF II supports the Scheme for Financing Viable Infrastructure Projects through the India Infrastructure Finance Company Limited (the Scheme) for promoting infrastructure' development primarily through public-private partnerships (PPP). Pursuant to the Scheme, IIFCL provides long-term financing on commercial terms for stand alone nonrecourse infrastructure projects. IIFCL will finance PPP subprojects selected through a transparent and competitive bidding process and only those assessed for commercial viability.
As of August 2009, IIFCL's project pipeline included 88 sanctioned projects with a total project cost of about $32 billion. The pipeline is expected to increase by 25 projects a year. As a result, IIFCL's balance sheet is projected at around $11 billion by fiscal year (FY)2013.
|Project Rationale and Linkage to Country/Regional Strategy
Reliable and high quality infrastructure is a critical determinant of productivity to support sustained economic growth and poverty reduction. While high quality infrastructure is essential to harness growth impulses in the economy, insufficient infrastructure capacity of India results in lower productivity, higher transport and logistic costs, and reduces competitiveness. With higher growth target and a rising population, even maintaining current levels of infrastructure will require staggering an enormous increase in investments.
Based on the targeted growth rate and identified deficit, required infrastructure investment is estimated at approximately $514 billion. Accordingly, the goal of the Government of India (the Government) is to increase infrastructure investment from 4.5% to 9% of gross domestic product during the 11th Five-Year Plan (FYP) period, FY 2007-FY2011. Investments deficits of this scale cannot be bridged by public financing that is already limited by fiscal constraints.
Recognizing the role of the private sector in infrastructure development, the Government has placed private sector participation (PSP) and PPP at the core of its infrastructure development strategy. In line with this approach, infrastructure development is being fostered by initiatives to create an enabling environment for PPP through (i) addressing policy and regulatory gaps in several infrastructure subsectors, (ii) enhancing the capacity of public institutions and officials to manage PPP processes, and (iii) increasing the volume of financing and availability of risk mitigation instruments to manage and allocate risks in line with the new business model. ADB is providing extensive support for mainstreaming PPP in India through four ongoing technical assistance (TA) projects.
The Government has also taken reform initiatives to develop financial markets and expand the suite of financial products for promoting PSP and PPP. As result, the equity, government securities, foreign exchange, and money markets along with their corresponding derivatives segments are now reasonably deep and liquid. The reforms have also strengthened price discovery, eased restrictions on transactions, lowered transaction costs, and enhanced liquidity. However, long-term investors, such as pension and insurance funds, have a limited presence in the Indian market due to regulatory restrictions. Further, domestic investment banks are inadequately capitalized and the asset-liability position of many large commercial banks may not support large scale infrastructure exposures.
While reforms to mitigate the financial constraints are ongoing and contemplated, mobilizing available resources and catalyzing additional resources still presents a challenge. The tight liquidity in the international financial markets as a result of the global financial crisis has further constrained the flow of long-term financing for infrastructure projects. In the circumstances, it is all the more important that reforms promote a infrastructure financing model where existing institutional capacity, skills products and services are leveraged through partnerships and synergies for bridging the infrastructure deficits through exchange of sector expertise, underwriting skills, and risk management.