The Indian government will help local companies raise funds in overseas markets by setting a benchmark. India needs to set up a regulatory framework to build its infrastructure, William Streeter, managing director and head of the global infrastructure group for Asia Pacific at Fitch Ratings, tells Sumit Sharma:
India lacks a long-term lending system to fund infrastructure projects. What needs to be done to help fund companies build infra projects?
One can see the economic growth in India and other Asian countries and also the ability of the contractors in India to bid and build construction projects. These will bring long-term benefits to the country. One can see more Indian companies becoming regional in operations, not just in manufacturing but also in infrastructure. Many institutional investors in America, Europe and Australia are taking notice of what’s happening in India and trying to figure out where there could be possible investement opportunities, besides equity. The equity markets are globalised now, but the debt markets are lagging and they are trying to bridge that gap.
What can India do to ensure long-term funds for infrastructure projects?
The 20-25 year debt structure doesn’t exist in India. This is where there are opportunities for domestic lenders to join international lenders. This can only be possible once you have sufficient supply of operating projects where you have cash flows everyone can see and measure.
How do you see domestic and long-term lenders joining?
They would need a few building blocks. First, they will need investment guidelines to permit them to invest. Then, there would have to be some form of credit enhancement so that they could shore up cash flows for projects, and multilaterals are logical sources for such credit enhancements, though there are some private companies that provide it on a smaller scale. Then there is IIFCL – its mandate could be modified to provide the same.
India aims to attract $1 trillion in five years from 2012 for infrastructure projects? Where do you think these funds can come from?
It’s not just the financing issue. The institutional capacity to build and operate is a big issue, as are the regulatory frameworks. I was really surprised to see airport norms close before the regulatory authority was created. In most countries that would be impossible because no one would lend until they knew what the regulatory environment was. According to a Fitch report, there are time or cost overruns in a bulk of projects because of delays in approval of drawings and unavailability of supporting infrastructure. It becomes a deterrent once it gets systemic. Demand is clearly there – one needs to create building blocks.
What role do you see for government rules and regulations? Are these facilitators or hurdles?
There are permits, approvals and regulations. All projects have a life cycle. So, there is an environmental criteria and eligibility of how we want to construct it and how we want to return. So, facilitating those approvals and streamlining them are important for the private sector. RBI’s regulatory regime for investors allowing more types of capital to flow towards infrastructure projects, unlocking the power of provident funds — these are things that will bring in more money.
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Do you see this kind of money flowing in? Do you see sectoral limits for banks restricting the flow of funds?
One of the reasons why sectoral caps seem to be coming in the way of banks expanding credit into infrastructure is high dependence on pure bank loan financing for new projects. There is a virtual absence of an active corporate bond market.
Is it a good time for Indian companies to tap overseas markets for funds?
It’s an interesting time because your lending rates look like good equity rates to western countries right now. India is a growing economy and so there is a possibility not only of good yield pick-up but also for currency appreciation. There are a lot of dynamics that will say it’s a good time but unless India can satisfy these investors about the stability and reliability of cash flows and continuous supply – not just one project today but a pipeline of projects for the next 10 years – that would allow for some of these international capital to be unlocked. India also needs to have enough hedging products to protect an investor from currency risk because over 10 to 20 years your currency can move in any direction and then the question arises: Does your assumptions of returns still hold good. Once that is in place, the interest rate benefits one gets will make it attractive for companies or projects to look at ECBs. Hedging is important.
Should India float a sovereign bond to set a benchmark for local companies to raise funds overseas?
Any kind of benchmark is good. It’s up to India. If there is a wide range of maturities, investors have a sense of how to price their debt at longer maturities. The Indian government is aware of this.
Any regulatory changes you would like to suggest?
I am impressed that RBI is being very active right now in terms of changing the investing environment for domestic and international investors and considering of external credit enhancement for domestic loans. These are the reforms that will broaden the capital base for infrastructure projects. They seem proactive at the moment.