Program

Poor infrastructure continues to remain a major bottleneck in the quest for high and inclusive economic growth. Besides institutional and regulatory issues, lack of finance is often viewed as the major reason for slow pace of infrastructure development in most developing countries. As per a McKinsey report (2017), the world needs to invest US$3.7 trillion¹ annually on economic infrastructure through 2035, and underinvestment in critical and new infrastructure would erode future growth potential and productivity. India alone requires over US$1.5 trillion in investment over the next 10 years to bridge the infrastructure deficit that exists in the country. However, there are many financing constraints that deter viable investments in infrastructure projects.

Main sources of infrastructure finance are budgetary support, internal and extra budgetary resources of the public sector enterprises and private investment. Private participation in infrastructure is mainly in the form of Public-Private Partnerships. PPPs supplement resources and improve efficiency of infrastructure investments. As per the Private Participation in Infrastructure database of the World Bank, India is second in the developing world both by the number of PPP projects as well as associated investments. India’s success in private participation in infrastructure is built on standardization of contracts, scheme of viability gap funding that provides grants to the private sector to a maximum of 20% of project costs, and a robust regulatory structure.

Bank financing, the main component of debt finance to infrastructure, suffers from asset-liability mismatch. To address this issue, India is keen to develop brownfield assets as a separate asset class for infrastructure investment. Brownfield assets are in the operational stage and are thus considerably de-risked as they are past land acquisition and environment and forest clearance stages. This makes them amenable to long-term institutional investment from pension, insurance and sovereign wealth funds. In the road sector, India has successfully launched the Toll-Operate-Transfer model as an example of development of brownfield assets as a separate asset class. Financial vehicles like Infrastructure Investment Trusts (InvlTs) and Real Estate Investment Trust (REITs) have also been launched for the same purpose.

Another opportunity is to make extensive use of Value Capture Finance (VCF). This refers to Government internalizing some of the externalities that infrastructure projects create. Appropriate VCF tools can be deployed to capture a part of the increment in value of private land and buildings that infrastructure projects create. This, in turn, can be used to fund increased public investment, creating a virtuous cycle in which value is created, realized and captured, and used again for public investment. Some VCF tools are already being used in urban India like conversion charges, betterment charges, and impact fees. The need is to standardize the use of VCF tools so that they are used more extensively with all public infrastructure investments. Along with these innovative financing tools, the effectiveness of conventional instruments such as property taxes and user charges should be strengthened.

Prof. Vladimir Yakunin-Chairman of Supervisory Board, Dialogue of Civilizations Research Institute, Bonn

Mr. Upendra Tripathy-Director General, International Solar Alliance

¹ McKinsey Global Institute. Bridging Infrastructure Gaps: Has the World Made Progress? October 2017.

Host country: Financing Infrastructure: Mobilizing Resources and Exploring New Instruments (June 25, 1430-1530), Godrej Theatre, NCPA

Objectives

Background

Speakers