India's ASSOCHAM Suggests Creation of $90 Billion "Infrastructure Fund" for Mega-Projects

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Associated Chambers of Commerce and Industry of India (ASSOCHAM) (New Delhi), the apex of industrial bodies in India, has advocated the creation of an "Infrastructure Financing Fund," as India lacks a single agency to finance infrastructure projects that are estimated to be worth $90 billion by 2011-12. ASSOCHAM has submitted a report to the Planning Commission and the Reserve Bank of India (Mumbai) detailing the benefits and options of creating the fund.

The Secretary General of ASSOCHAM, D. S. Rawat, suggested that the center and states should collaborate in setting up the fund exclusively to meet the financing requirements of infrastructure projects. An estimated $12 billion, which will be about 1% of India's GDP by 2012, will be required from the central government to fund such projects. The contribution of financing from public sector enterprises is likely to be around $35 billion, which will represent about 3% of India's GDP by 2011-12. The total financing required for large-scale projects at that time is estimated to be more than $90 billion, nearly 7.5% of the country's GDP.

Most infrastructure projects require large initial capital investments that are often provided by a consortium of banks. The banks are constrained by an exposure limit to every sector, individual entities or companies. The high capital costs of these projects and the risk of exceeding exposure limits faced by banks are some of the factors discouraging banks from committing themselves to such large projects.

ASSOCHAM proposed that the best solution is to create and manage a joint corpus fund by the states and the center in order to mobilize funds. This will ensure that infrastructure projects planned by the state, center or joint ventures do not suffer setbacks because of high capital costs.

ASSOCHAM's report also recommends that credit extension offered by commercial banks and financial institutions for infrastructure projects be increased from the existing 10% to 20% during the next few years. Consequently, the organization's share in outstanding bank credit should also be more than doubled from the present 8% to more than 20%.

ASSOCHAM has emphasized that it is in favor of the Reserve Bank of India implementing the recommendations of the R. H. Patil Committee pertaining to the corporate debt market. One of the recommendations made by the committee in a report submitted in 2005 was to promote disclosure and increase transparency standards in the secondary market. The ASSOCHAM report also suggests offering incentives to non-banking financial institutions to promote their active participation and lending to infrastructure projects.

State-run financial institutions and private financing companies should work together to form partnerships that will help in providing the estimated $30 billion investment for infrastructure projects. Projects executed as a joint venture between public and private sector companies will guarantee financing.

ASSOCHAM has laid out a plan for the National Highways Authority of India (NHAI) (New Delhi), the central authority that develops and manages nearly 66,500 kilometers of road network in India, to contribute to the development of state highways. The Chamber suggests that NHAI raise debt for its projects through a special purpose vehicle and channel revenues into the vehicle. By separating the debt from the parent agency, NHAI will be able to effectively use additional debt for other development projects such as construction of state highways.

Lack of a good road network infrastructure is detrimental to the development and urbanization of tier II and tier III cities, as pointed out by ASSOCHAM. The industry body has stressed the need for the government to focus on developing state highway infrastructure and capitalizing on the increasing purchasing power of people for services provided.

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