Creating special entities for funding public transport infrastructure projects in India

Arun Posted on: 2018-12-06 09:17:39 Viewer: 399 Comments: 0 Country: India City:

Creating special entities for funding public transport infrastructure projects in India

Public transport infrastructure projects encompassing road, rail, and water transport are generally long-gestation and capital-intensive, with low or even negative Financial Rates of Return but with high Economic Rate of Return. In India, such projects are largely financed by a combination of budgetary funding and long-term domestic/international debt funding. A few projects utilize the Public-Private Partnership (PPP) route, but the focus here is more on real estate rather than the larger cause of transportation.

Projects funded by debt often run into difficulties in meeting repayment obligations, which can arise at a relatively early stage of operations on account of low returns on investment (RoI). This often leads to unsustainable financial loads on the budgets of the Government, which may result in disbursement delay to the detriment of project cash flows. This, in turn, may lead to delays in project execution, cost escalation and compromises in the quality of work and the levels of service offered to the customer.

Moreover, stresses can arise out of the inability of the project to meet debt repayment obligations from the operating cash flows, which in turn may lead to compromises in essential required maintenance, assets replacement, and project improvements. Funding in the form of Bonds or longer tenure loans with a telescopic repayment structure often fails to address the initial required operational cash flow support needs arising due to the high gestation periods of these projects. In sum, the quality of project execution, management as well as the levels of service to the customer may get adversely affected if the financing architecture is not viable, robust and sustainable.

The lessons learned from the experience of countries like India in implementing public infrastructure projects is that there is a need to create new and innovative financing architecture for such projects, which seek to overcome the defects and deficiencies of the existing system. The need, therefore, arises for setting up specialized project financing SPVs which will have the required expertise nested within them, encompassing disciplines like project financing, funding technology support, environmental management and key innovations, which are not generally within the core competence of infrastructure project implementing agencies.

Additionally, through a centralized payment system set up by the SPV, the individual projects can save on processing time and effort as well as the SPV can optimally use the cash reserves. Idea is to create a specialized entity (SPV) with a combination of financing, management and knowledge service experts, whose primary functions are to finance the infrastructure projects through a mix of debt and equity participation. The equity will enable exercising managerial control over the project and consequently to overview the execution and operation of the project through its panel of experts. The SPVs can explore new financing options, including a variety of PPP possibilities.

The corpus of the SPV can be built up by a combination of equity, soft loans, sovereign loans, bonds and recourse to special funds like pension funds. This SPV can also be mandated to park its money in safe, high-yielding locations for disbursement to the projects on the ground. After the infrastructure project is implemented and stabilized, the SPV can also plan for withdrawal from the project through disinvestments/ buy-back or sale of stakes. Till then the support from the SPV through the timely infusion of equity will continue to ensure operational cash flow support.

If such an arrangement is in place, infra project-implementing agencies can concentrate on their core competence of project planning and execution, while the specialized SPV can utilize their expertise and economies-of-scale benefits to explore the best possible sources of funding domestically and internationally, can provide technology support, can help in implementing sustainable and robust best practices across all domains and more importantly can act as the representative of the state in uniformly implementing the larger interest of environmental and social causes in a economically viable manner. To this extent, individual projects can save on costs.

The state will also get an opportunity to bundle up a group of projects with different ROI profile, so as to build a portfolio of projects, which supports each other in ensuring economic viability. The participating financial institutions and government can ensure that their funds are appropriately distributed among various projects and these projects are effectively controlled and supervised by a specialized agency. The financial institutions can be relieved completely of the threat of NPA and risk of default, and at the same time be ensured of returns on their funds. The State will develop a centralized key expertise in project execution and management, which would provide a strong knowledge capital for the infrastructure needs of the state.

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