THE SENIOR ANALYST
whereas most projects are rated in the BB
category. Capital gains tax needs to be paid in
case of unlisted projects and this has kept many
interested equity investors away.
Underdeveloped financial markets
Due to the absence of a long-term financing
system in India, banks have had to utilize short
term deposits to finance infrastructure projects.
In case of long-term agreements, banks have
been exposed to asset-liability mismatch while
the projects bear interest rate risk in case of short
term loans. Underdeveloped derivative markets
have led to a lack of risk management
instruments for potential investors. Most of the
savings of the country have been invested into
physical assets and the financial savings haven’t
reached the infrastructure sector due to a lack of
long-term savings products. Foreign investors
tend to stay away from investing in infrastructure
projects as there are no options to hedge longterm exchange rate risk.
Meeting the funding needs
The government’s focus on infrastructure
development is evident and in the past it has
taken several measures to enhance the levels of
investment in the sector. It is equally important
to mobilize private investment in the sector
which would require systemic interventions by
the government. The financial intermediaries and
developers also have an important part to play to
support the government in their endeavor to
meet the ambition of $ 1 trillion investment in
the ongoing five year plan period.
Development of long-term bond markets
India lags behind most of the western countries in
the depth of its debt markets which are
dominated by the public sector. Also there is a
lack of instruments for the long term. With yields
stagnating across the globe, this could be an
opportunity for India to attract foreign
investment in an accelerated manner.
Jan 2014
International pension funds would be the primary
investor in such long term bonds and they are
willing to invest a huge corpus for decades. But
these investors would only be interested if they
are convinced with the stability of the
environment and have confidence in the financial
system.
Securitization
Securitization enables financial institutions to
transform financial assets into marketable
securities. This can help through enhanced credit
ratings and improved liquidity which results in
lower cost and greater amount of funds.
Securitization is more successful when the
projects have completed construction phase and
are generating revenues which means the
projects carry a lower level of risk and are more
appealing to potential investors.
Credit Enhancement
Credit enhancement products provide security to
lenders to infrastructure projects. They are more
effective in the developing world as these
projects carry varieties of risk. The facility aims to
provide a partial credit guarantee which
enhances the credit rating of the project and
hence, channelization of funds becomes much
easier. As discussed earlier, stringent norms have
been placed by regulatory bodies for investment
in infrastructure bonds. The credit enhancement
facilities could bring a large number of projects
under the category of eligible projects for
investment.
Other measures
The development of currency and derivatives
market is critical to enhancement of foreign
investment in the infrastructure sector. These
instruments will enable the investors to hedge
their risks and would be willing to invest in the
country for a longer-term as needed by
infrastructure projects. Caps on investment in the
infrastructure sector for banks, life insurance
Page 18