With the international liquidity crunch making its impact felt in India, the government and the Reserve Bank of India (RBI) have taken a series of measures, since the middle of 2008, to bolster the infrastructure sector, as this sector is seen as a potential engine for growth in a slowing economy.
Accessing funds overseas
On the external commercial borrowings (ECB) front, the RBI created a wider window for the infrastructure sector for end use involving rupee capital expenditure. Soon after, however, end use for rupee expenditure was liberalized to the position prevailing prior to August 2007 – i.e. freely permissible under the automatic route for corporate and infrastructure-related loans alike – up to US$500 million per year.
The government’s measures do not stop here and its commitment to the sector was equally evident in the monetary and fiscal measures constituting the recently announced stimulus package – part II.
The removal of interest rate caps under the ECB policy, although not directed exclusively to infrastructure, has been generally well received by the industry. It is anticipated that this will assist in creating access to overseas capital.
The measured relaxations to all-in-cost ceilings undertaken earlier were not as successful in keeping in sync with the international credit markets and the increasing cost of credit. In addition, non-banking financial companies lending for infrastructure projects are now permitted to access the ECB route from multilateral and bilateral financial institutions.
What remains now is for international banks to regain their appetite for lending.
In the previous stimulus package, the government had authorized India Infrastructure Finance Corporation (IIFCL) – the government’s special purpose vehicle for infrastructure finance – to raise tax-free bonds worth up to Rs1,000 billion (US$19.3 billion) to facilitate financial closure for public-private partnership infrastructure projects.
IIFCL has been provided access to an additional Rs3,000 billion through similar tax-free bonds once the first round of funds have been utilized. The objective is to fund infrastructure projects – in particular highways and ports – at competitive rates.
Special asset classification provisions have made for seven key identified infrastructure projects that were delayed due to the developments in the international credit markets.
Finally, the general lowering of interest rates by the RBI should at some point in the foreseeable future make domestic debt funds more affordable for borrowers, provided of course that the projects seeking funding are financially viable.
Practical steps required
These positive moves now need to be coupled with a few practical steps that would encourage both investors and lenders to look more seriously at Indian infrastructure projects.
First, improvements are required at the conception and management stage of bid processes for large public infrastructure projects. Examples of this come from changes made to the eligibility criteria for the recent tenders issued with respect to highway projects. These changes restricted the number of bids an entity could make and did not permit any member of a bidding consortium to hold over 1% interest, directly or indirectly, in any member of any other bidding consortium.
This severely restricted the number of bidders (many companies simply did not know whether or not a group company held any interest in another bidder) meaning that some projects did not attract the minimum number of bids required by the tender process.
Further, a lack of clarity on tender conditions has meant that some of these conditions are capable of being amended after the project has been awarded, making them subject to challenges by unsuccessful bidders and leading to delays.
Second, greater transparency and predictability is required in the manner in which permits and consents for infrastructure projects are granted.
In most cases, no time limits are imposed on central, state and local governments to grant or refuse consents and too much discretion remains in the hands of government officials.
This too can lead to delays and worse, the non-implementation of otherwise viable and necessary projects.
Akshay Jaitly is a partner at Trilegal in Delhi and Ameya Khandge is a counsel at Trilegal in Mumbai. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 100 lawyers, some of whom have experience with law firms in the United States, the United Kingdom and Japan.
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