Infrastructure gets a boost

The government’s proposal to let financial institutions guarantee bonds issued by infrastructure providers is welcome as it would enable them to raise cheaper funds and boost investment in infrastructure projects. It would also encourage long-term investors including pension funds and insurance firms to put more money in infrastructure bond offerings, giving a fillip to the corporate bond market.

A guarantee by state-owned India Infrastructure Finance Company (IIFCL) would, however, add to the contingent liabilities of the Centre. Due diligence is, therefore, a must and the IIFCL should provide guarantees only to bond-issuers whose projects are found to be commercially viable. This would call for a rigorous appraisal of the project as is done for a bank loan. In the past, the RBI had rejected a proposal of the State Bank of India to provide guarantee to Tata Motors for its debenture issue, saying the company should raise money on the strength of its own rating. However, new special purpose vehicles floated by infrastructure firms do not have ratings.

These SPVs cannot access competitive funds. Banks are also unable to provide them long-term capital as they raise deposits that have an average maturity of only 3-5 years. The government’s proposal makes eminent sense as it would help break the log-jam in infrastructure financing. In parallel, banks can also be allowed to raise long-term, tax-free bonds to help them provide loans for infrastructure projects at competitive rates. Private contributors, domestic and foreign, should also be innovatively incentivised to bridge the demand supply mismatch in infrastructure.

Better infrastructure would lower business costs in India and enhance GDP growth. However, building infrastructure needs more than finances. Road projects, for instance, have been marred by poor surveys, missed deadlines and cost over-runs. Delivery has to be assessed not in terms of award of the contract, but on the basis of kilometers built. User charges, whether for roads, power or water, must be realised.