Infrastructural Financing in India And the Landscape of the Last 20 Years’

(1) Trend and Initiative of the Budgetary Support and Institutional Borrowings –

The system of managing and financing Page Design Web infrastructural facilities has been changing significantly since the mid-eighties. The Eighth Plan (1992-97) envisaged cost recovery to be built into the financing system. This has further been reinforced during the Ninth Plan period (1997-2002) with a substantial reduction in budgetary allocations for infrastructure development. A strong case has been made for making the public agencies accountable and financially viable. Most of the infrastructure projects are to be undertaken through institutional finance rather than budgetary support. The state level organizations responsible for providing infrastructural services, metropolitan and other urban development agencies are expected to make capital investments financing on their own, besides covering the operational costs for their infrastructural services. The costs of borrowing have gone up significantly for all these agencies over the years. This has come in their way of their taking up schemes that are socially desirable schemes but are financially less or non-remunerative. Projects for the provision of water, sewerage and sanitation facilities etc., which generally have a long gestation period and require a substantial component of subsidy, have, thus, received a low priority in this changed policy perspective.


Housing and Urban Development Corporation (HUDCO), set up in the sixties by the Government of India to support urban development schemes, had tried to give an impetus to financing projects by opening a special window in the late eighties. Availability of loans from this window, generally at less than the market rate, was expected to make state and city level agencies, including the municipalities, borrow from Housing and Urban Development Corporation. This was more so for projects in cities and towns with less than a million populations since their capacity to financing draw upon internal resources was limited.

Housing and Urban Development Corporation finances even now up to 70 percent of the costs in case of public utility projects and social infrastructure. For economic and commercial infrastructure, the share ranges from 50 per cent for the private agencies to 80 percent for public agencies. The loan is to be repaid in quarterly installments within a period of 10 to 15 years, except for the private agencies for whom the repayment period is shorter. The interest rates for the borrowings from Housing and Urban Development Corporation vary from 15 percent for utility infrastructure of the financing  public agencies to 19.5 percent for the commercial infrastructure of the private sector. The range is much less than what used to be at the time of opening the infrastructure window by Housing and Urban Development Corporation. This increase in the average rate of interest and reduction in the range is because its average cost of borrowing has gone up from about 7 per cent to 14 per cent during the last two and a half decade.

Importantly, Housing and Urban Development Corporation loans were available for upgrading and improving the basic services in slums at a rate lower than the normal schemes in the early nineties. These were much cheaper than under similar schemes of the World Bank. However, such loans are no longer available. Also, earlier the Corporation was charging differential interest rates from local financing bodies in towns and cities depending upon their population size. For urban centers with less than half a million population, the rate was 14.5 percent; for cities with the population between half to one million, it was 17 percent; and a huge number of cities, it was 18 percent. No special concessional rate was, however, charged for the towns with less than a hundred or fifty thousand financing population that are in dire need of infrastructural improvement, as discussed above.

It is unfortunate, however, that even this small bias in favor of smaller cities has now been given up. Further, Housing and Urban Development Corporation was financing up to 90 percent of the project cost in case of infrastructural schemes for ‘economically financing weaker sections’ which, too, has been discontinued in recent years.

Housing and Urban Development Corporation was and continue to be the premier financial institution for disbursing loans under the Integrated Low-Cost Sanitation Scheme of the government. The loans, as well as the subsidy components for different beneficiary categories under the scheme, are released through the Corporation. A number of funds available through this channel has gone down drastically in the nineties.

Given the stoppage of equity support from the government, increased cost of resource mobilization, and pressure from international agencies to make infrastructural financing commercially viable, Housing and Urban Development Corporation has responded by increasing the average rate of interest and bringing down the amounts advanced to the social sectors. Most significantly, there has been a reduction in the interest rate differentiation, designed for achieving social equity.


An analysis of infrastructural finances disbursed through Housing and Urban Development Corporation shows that the development authorities and municipal corporations that exist only in larger urban centers operate have received more than half of the total amount. The agencies like Water Supply and Sewerage Boards and Housing Boards, that have the entire state within their jurisdiction, on the other hand, have received altogether less than one-third of the total loans. Municipalities financing with less than a hundred thousand population or local agencies with weak economic base often find it difficult to approach Housing and Urban Development Corporation for loans. This is so even under the central government schemes like the Integrated Development of Small and Medium Towns, routed through Housing and Urban Development Corporation, that carry a subsidy component. These towns are generally not in a position to obtain state government’s guarantee due to their uncertain financial position. The central government and the Reserve Bank of India have proposed restrictions on many of the states for giving guarantees to local bodies and para-statal agencies, in an attempt to ensure fiscal discipline.

Also, the states are being persuaded to register a fixed percentage of the amount guaranteed by them as a liability in their accounting system. More importantly, in most of the states, only the para-statal agencies and municipal corporations have been given state guarantee with the total exclusion of smaller municipal bodies. Understandably, getting bank guarantee is even more difficult, especially, for the urban centers in less developed states and all small and medium towns.

The Infrastructure Leasing and Financial Services (ILFS), established in 1989, are coming up as an important financial institution in recent years. It is a private sector financial intermediary financing  wherein the Government of India owns a small equity share. Its activities have more or less remained confined to the development of industrial townships, roads, and highways where risks are comparatively less. It basically undertakes project feasibility studies and provides a variety of financial as well as engineering services. Its role, therefore, is that of a merchant banker rather than of a mere loan provider so far as infrastructure financing is considered and its share in the total infrastructural finance in the country remains limited.

Infrastructure Leasing and Financial Services has helped local bodies, para-statal agencies and private organizations in preparing feasibility reports of commercially viable projects, detailing out the pricing and cost recovery mechanisms and establishing joint venture companies called Special Purpose Vehicles (SPV).

Further, it has become equity holders in these companies along with other public and private agencies, including financing the operator of the BOT project. The role of Infrastructure Leasing and Financial Services may, thus, be seen as a promoter of a new perspective of development and a participatory arrangement for project financing. It is trying to acquire the dominant position for the purpose of influencing the composition of infrastructural projects and the system of their financing in the country.

Mention must be made here of the Financial Institutions Reform and Expansion (FIRE) Programme, launched under the auspices of the USAID. Its basic objective is to enhance resource availability for commercially viable infrastructure projects through the development of domestic debt market. Fifty percent of the project cost is financed from the funds raised in US capital market under Housing Guaranty fund. This has been made available for a long period of thirty years at an interest rate of 6 percent, thanks to the guarantee from the US-Congress.

The risk involved in the exchange rate fluctuation due to the long period of capital borrowing is being mitigated by a swapping arrangement through the Grigsby Bradford and Company and Government Financing Officers’ Association for which they would charge an interest rate of 6 to 7 percent. The interest rate for the funds from US market, thus, does not work out as much cheaper than that raised internally.

The funds under the program are being channeled through Infrastructure Leasing and Financial Services and Housing and Urban Development Corporation who are expected to raise a matching contribution for the project from the domestic debt market. A long list of agenda for policy reform pertaining to urban governance, land management, pricing of services etc. have been proposed for the two participating institutions. For providing loans under the program, the two agencies are supposed to examine the financial viability or bankability of the projects. This, it is hoped, would ensure financial discipline on the part of the borrowing agencies like private and public companies, municipal bodies, para-statal agencies etc. as also the state governments that have to stand guarantee to the projects. The major question, here, however, is whether funds from these agencies would be available for social sectors schemes that have a long gestation period and low commercial viability.


Institutional funds are available also under Employees State Insurance Scheme and Employer’s Provident Fund. These have a longer maturity period and are, thus, more suited for infrastructure financing. There are, however, regulations requiring the investment to be channeled in government securities and other debt instruments in a ‘socially desirable’ manner. The government, however, is seriously considering proposals to relax these stipulations so that the funds can be made available for earning higher returns, as per the principle of commercial profitability.

There are several international actors that are active in the infrastructure sector like the Governments of United Kingdom (through Department for International Development), Australia and Netherlands. These have taken up projects pertaining to the provision of infrastructure and basic amenities under their bilateral co-operation programs. Their financial support, although very small in comparison with that coming from other agencies discussed below, has generally gone into projects that are unlikely to be picked up by the private sector and may have problems of cost recovery. World Bank, Asian Development Bank, OECF (Japan), on the other hand, are the agencies that have financed infrastructure projects that are commercially viable and have the potential of being replicated on a large scale. The share of these agencies in the total funds into infrastructure sector is substantial. The problem, here, however, is that the funds have generally been made available when the borrowing agencies are able to involve private entrepreneurs in the project or mobilize certain stipulated amount from the capital market. This has proved to be a major bottleneck in the launching of a large number of projects. Several social sector projects have failed at different stages of a formulation or implementation due to their long payback period and uncertain profit potential. These projects also face serious difficulties in meeting the conditions laid down by the international agencies.

(2) Trend and Initiative of the Borrowings by Government and Public Undertakings from Capital Market –

A strong plea has been made for mobilizing resources from the capital market for infrastructural investment. Unfortunately, there are not many projects in the country that have been perceived as commercially viable, for which funds can easily be lifted from the market.

The weak financial position and revenue sources of the state undertakings in this sector make this even more difficult. As a consequence, innovative credit instruments have been designed to enable the local bodies to tap the capital market.

Bonds, for example, are being issued through institutional arrangements in such a manner that the borrowing agency is required to pledge or escrow certain buoyant sources of revenue for debt servicing. This is a mechanism by which the debt repayment obligations are given utmost priority and kept independent of the overall financial position of the borrowing agency. It ensures that a trustee would monitor the debt servicing and that the borrowing agency would not have access to the pledged resources until the loan is repaid.

The most important development in the context of investment in infrastructure and amenities is the emergence of credit rating institutions in the country. With the financial markets becoming global and competitive and the borrowers’ base increasingly diversified, investors and regulators prefer to rely on the opinion of these institutions for their decisions. The rating of the debt instruments of the corporate bodies, financial agencies and banks are currently being done by the institutions like Information and Credit Rating Agency of India (ICRA), Credit Analysis and Research (CARE) and Credit Rating Information Services of India Limited (CRISIL) etc. The rating of the urban local bodies has, however, been done so far by only Information and Credit Rating Agency of India, that too only since 1995-96.

Given the controls of the state government on the borrowing agencies, it is not easy for any institution to assess the ‘functioning and managerial capabilities’ of these agencies in any meaningful manner so as to give a precise rating. Furthermore, the ‘present financial position’ of an agency in no way reflects its strength or managerial efficiency. There could be several reasons for the revenue income, expenditure, and budgetary surplus to be high other than its administrative efficiency. Large sums being received as grants or as remuneration for providing certain services could explain that. The surplus in the current or capital account cannot be a basis for cross-sectional or temporal comparison since the user charges permitted by the state governments may vary.

More important than obtaining the relevant information, there is the problem of choosing a development perspective. The rating institutions would have difficulties in deciding whether to go to measures of financial performance like total revenue including grants or build appropriate indicators to reflect managerial efficiency. One can possibly justify the former on the ground that for debt servicing, what one needs is high income, irrespective of its source or managerial efficiency. This would, however, imply taking a very short-term view of the situation. Instead, if the rating agency considers a level of managerial efficiency, a structure of governance or economic strength in the long-term context, it would be able to support the projects that may have debt repayment problems in the short run but would succeed in the long run.

The indicators that it may then consider would pertain to the provisions in state legislation regarding decentralisation, stability of the government in the city and the state, per capita income of the population, level of industrial and commercial activity etc. All these have a direct bearing on the prospect of increasing user charges in the long run. The body, for example, would be able to generate higher revenues through periodic revision of user-charges, if per capita income levels of its residents are high.


The rating agencies have, indeed, taken a medium or long-term view, as may be noted from the Rating Reports of various public undertakings in the recent past. These have generally based their rating on a host of quantitative and qualitative factors, including those pertaining to the policy perspective at the state or local level and not simply a few measurable indicators.

The only problem is that it has neither detailed out all these factors nor specified the procedures by which the qualitative dimensions have been brought within the credit rating framework, without much ambiguity.

In recent time India has made significant progress in mobilizing private investment for infrastructure. Infrastructure finance nearly doubled in the last decade and is expected to grow further under the government’s 12th Plan (2012-17), which calls for investments in the sector of about US$ 1 trillion, with a contribution from the private sector of at least half.

Still, it is not enough to draw the final conclusion due to following reasons:

(1) Meeting the ambitious targets fully will be challenging in long run,
(2) Major changes are needed in the way banks appraise and finance projects,
(3) The government has taken a number of recent initiatives to expand private investment in infrastructure, but their impact has not yet been felt.

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