India is likely to face a shortfall of between $150 billion and $190 billion in financing its infrastructure projects in the current Five-Year Plan period (2007-12), as the global economic slowdown and rising interest rate would make project financing expensive and financial closure more difficult, McKinsey & Company said in a report released today.
The report titled ‘Building India: Financing and investing in infrastructure’ cites exposure limit for banks, investment restrictions on long-term savings mobilisers like insurance and pension fund as regulatory barriers in financing infrastructure needs.
| BRIDGING THE GAP Revenue potential for financiers in infrastructure sector | ||
| Sector | From 2010 to 2014 | Beyond 2014 |
| Power | 4.2-4.9 | 1.2-1.4 |
| Roads | 2.4-2.8 | 0.57-0.65 |
| Ports | 0.65-0.72 | 0.16-0.18 |
| Source: McKinsey & Co (Figures in $ billion) | ||
Arguing for capital flow to infrastructure, Anu Madgavkar, partner of McKinsey and one of the co-authors of the report, said, “Government nodal agencies must focus sharply on accelerating implementation of existing projects, and offering new projects for development.”
As part of the Eleventh Five-Year Plan, India had planned to invest $500 billion in infrastructure with one-fourth of this investment to be met through public-private partnerships. The estimate by the Planning Commission was made when rupee was trading at Rs 41 to a US dollar. Now, it has fallen sharply to Rs 51.25 to a dollar on Monday.
To overcome funding constraints, McKinsey argues for allowing banks to raise long-term bonds that are exempt from statutory reserve requirements, and also ease norms for insurance firms and pension funds to invest in infrastructure projects.
However, the report says that financial sector players could earn $10–12 billion between 2010 and 2014 by meeting the financing needs of infrastructure sector. Beyond 2014, the revenue potential is estimated between $25 billion and $29 billion.
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“Several project models with different risk-return implications are available for capital participation across all core sectors. Success will lie in building a profitable business model that earns a high sustained return on capital,” the report said.
Nearly two-thirds of the potential revenue would come from three sectors — power, roads and ports — which also form 57 per cent of the planned spend in the current plan period.
The report also suggest financiers to move away from being debt focused to selling other products like advisory, lending, transaction banking, debt and equity fund raising, equity investment and general insurance that will increase their earnings.
A market survey undertaken by McKinsey of 40 infrastructure developers across eight sectors has also revealed the need for such products. Small banks and financiers could also get a portion of the potential revenue as nearly half of the developers said they are willing to look beyond the top three banks while deciding on financing their future projects.