| Infrastructure financing needs investments over a much longer period than for commercial loans. However, typical commercials lenders find it difficult for them to investment for long periods, say 20- 30 years. Capital market is one of the sources most suitable to meet the long-term invest needs of the infrastructure sector (for the supply of both equity and debt). A successful capital market is very helpful for a thriving PPP programme in a country. | Why special financing institution? |
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Many countries have established special financing institutions to meet the long-term debt financing needs for their infrastructure sectors. Public-private partnership projects awarded to private companies for development, financing and construction receive priority for financing from such institutions. Another important role such financing institutions playing is the refinancing of those private sector projects initially financed by banks, which find long-term financing for infrastructure projects difficult. See box 8 for examples of such institutions established in India.
Another innovation in infrastructure finance is pooled finance. Larger local government bodies may have the capacity to access domestic capital markets to fund infrastructure projects. However, it is difficult for small-and medium-sized local bodies to have access to the capital market. Pooled finance is an innovative mechanism, pioneered in the United States of America, which has been used for financing of infrastructure projects as well as to reduce the cost of debt financing. The government provides grants or “seed money” to establish a fund to capitalize on other loan funds and resources. Total assets in a pooled finance fund can become quite significant over the years through government contributions, state match, leveraging, loan repayments and interest earnings.35 The money in the fund, in turn, is made available to local bodies for financing of their projects. Various financial innovations such as refinancing, government loans, long repayment period etc., are used to reduce the cost of financing from the fund compared with conventional sources. The State of Tamil Nadu in India has established such a pooled finance fund called Tamil Nadu Urban Development Fund (see Box 8).
| Box 8. Tamil Nadu Urban Development Fund The Tamil Nadu Urban Development Fund (TNUDF) was established in 1996 as a trust with contributions from the State Government of Tamil Nadu and several All-India financial institutions. In addition to equity, the Fund had access to a line of credit of about Rs 3.7 billion from the World Bank, on-lent by the State Government. TNUDF is the first public-private financial intermediary in India providing long-term debt for infrastructure development on a non-guarantee mode. The management of the TNUDF was sought to be in a different format to attract better talent into the fund management and to relieve the Fund of substantial political and regulatory risks. Tamil Nadu Urban Infrastructure Financial Services Limited (TNUIFSL) was established as the Fund Manager of TNUDF. By 2000-01, the Fund had grown to Rs 2 billion with 29 per cent of the capital invested by the participating financial institutions and the remaining 71 per cent equity participation by the State Government. Leveraging its capital base, TNUDF has raised cheaper debt funds by floating non-convertible bonds in 2000 and raised Rs 1,000 million. The Fund in its first year of operation had approved municipal loans worth Rs 1.5 billion for infrastructure projects including in the urban transport sector. | |
| Source: | Venkatachalam, Pritha, 2005. Innovative approaches to municipal infrastructure financing: A case study on Tamil Nadu, India, Development Studies Institute Working Paper No. 05-68, London School of Economics, London. |
It may be mentioned here that in countries with large PPP programmes, unlike in the past, domestic financing has become more common than foreign investment. This trend is expected to continue in the future. This has made establishment of special infrastructure financing institutions and development of domestic capital market and innovative financial instruments more important. One major advantage of domestic financing is that it reduces the risks due to fluctuation of the local currency. It also reduces country’s obligation to allow repatriation of capital and profit.
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35 For example, the Clean Water State Revolving Fund (CWSRF) program in the United States, have grown to over US$ 42 billion. For each federal dollar invested, this program is making US$1.90 available for important water quality projects each year. (See United States Department of State website at <http://www.state.gov/g/oes/rls/fs/2003/18949.htm> (19 July 2006).