India's infrastructure barons: Part 3

K Ramchand of IL&FS Transportation Networks suggests out of the box thinking could be the way forward to finance India's infrastructure needs.
IL&FS Transportation Networks (ITNL) was formed by Infrastructure Leasing and Financial Services to create a pan-India surface transport business. We talk to the company's president and CEO, K Ramchand.

What is ITNLÆs business model?
ITNL will agglomerate assets through acquisitions û both IL&FS and non-IL&FS sponsored. It will also participate in greenfield projects and provide advisory services. As a first step, the holdings of IL&FS and investors in IL&FS sponsored projects are being transferred to ITNL. ITNL is also identifying non-IL&FS sponsored projects.

Transportation infrastructure is very costly around the world. What are the best means to get such projects financed?
Given limited government resources, there is a need for private sector participation and commercial financing in the sector. However, several transportation projects are marginally/not financially viable, but socially important. Therefore, the government will need to fund the viability gap to make such projects economically viable. Currently, the viability gap has been bridged by a government cash grant in some cases. However, limited government resources constrain the number of projects where this can happen.

A significant portion of the economic value created with the development of transport facilities is by way of appreciation in real estate asset values in the vicinity of the project. The development of a structure to capture a portion of this economic value can be used to part finance the project. Such bundling would permit more, larger size projects to be taken up. It will also widen potential investor interest bringing into the ambit players with interests in real estate and manufacturing.

India has significant foreign reserves of over $160 billion, which are approx. 17 times the monthly imports into India, growing at an average of about $28 billion per year over the last three years. It has been suggested that these foreign reserves are in excess of even the most conservative prudent requirements and are presently sub optimally utilized. For more effective utilization, the government could consider allocating a portion of such reserves to an infrastructure fund.

In what ways is lack of transportation infrastructure stymieing growth in India?
The interface between transportation investment and economic development has broad ramifications that go beyond transportationÆs basic purpose of moving goods and people from one place to another. An efficient transportation system can improve the productivity of the economy by reducing transaction costs and accelerating social development.

Poor quality of transportation infrastructure is affecting the countyÆs competitiveness. Commercial vehicles in India traverse only 250û300km (average speed of 30 km/h) a day against 600km (average speed 60 km/h) in developed countries. Non-availability of rakes/ wagons and high berthing and turn-around time leads to delays in shipments, increased inventory costs and input costs

A significant portion of IndiaÆs GDP is contributed by agriculture. Poor transport infrastructure leads to significant wastage of agricultural produce and other perishable goods. It also results in increased fuel and operating costs of vehicles causing the prices of goods and services to increase and increasing inflationary pressures. Further, air and noise pollution affect the environment and negatively impacts quality of life of the citizens. The overall economic loss due to the lack of an efficient highway system is estimated at $4.5û$6.5 billion per annum by CRISIL.

Finally, reduced competitiveness due to inefficient transport infrastructure has been deterring investments in the country. Long waiting times at airports and frequent delays impact the countryÆs image as an investment destination.

What new sources could be tapped to finance such projects?
The development of domestic capital markets is key to creating a sustainable supply of capital. Most banks do not have access to long-term funds and therefore, do not have the ability to provide the maturities (18 û 20 years) infrastructure projects require due to asset-liability management considerations. There is a need for a new investor class in infrastructure with longer investment horizons. Long-term saving vehicles like provident funds and insurance companies have long term funds and the required profile but are currently allowed to invest largely in specified securities. Opening this avenue is an option.

The secondary market for infrastructure securities is fairly small in India. Therefore, liquidating investments in the secondary markets require considerable financial structuring and repackaging of the investment. The development of a secondary capital market for infrastructure projects will provide avenues for divestment

Why has airport development in India been so contentious to date?
The sector has been recently opened to private sector participation and a consensus amongst various stakeholders, including trade unions, has taken time to evolve. Airport development, which by definition requires proximity to urban centres and significant land acquisition, involves relocation and resettlement of a fairly large number of people. This process needs to be managed sensitively to ensure the sustainability of the project.

For more on this subject see the cover story of FinanceAsia's December/January magazine
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