In a scenario where the government has accorded first and foremost priority to infrastructure development, along with the present inadequacy of funds for infrastructure projects, the role of banks and public financial institutions needs to be augmented by multilateral agencies. The latter’s active involvement as lenders to a project can not only help in providing technical and project structuring support, but can also reduce the risk perception on the part of foreign investors.
Size and growth
From 2011-12 to 2016-17 (April-November 2016), the World Bank, the Asian Development Bank (ADB), the Japan International Cooperation Agency (JICA) and the International Finance Corporation (IFC) together extended $33.04 billion for 102 infrastructure projects in the country. From 2011-12 to 2015-16, funding activity showed a mixed trend. However, the year 2015-16 witnessed an increase in financial assistance of 7.35 per cent over 2014-15.
During April-November 2016, ADB had the highest share among multilateral agencies of funds provided to the infrastructure sector. Of the eight projects that secured financing, loan agreements (worth $2.47 billion) have been signed with ADB for six of them. Infrastructure projects in roads, renewable energy, water and waste management, and railways received financial assistance from the agency.
Role of multilateral agencies
- Crowding-in private investment: Private sector arms of multilateral agencies provide financial products and related advisory services to developing countries, thereby crowding-in private investment. Equity investment, guarantees and technical assistance from these agencies make it easier to leverage private finance.
- Access to overseas bond markets: International funding agencies are well placed to tap overseas bond markets through the issuance of rupee-denominated bonds. As part of the regulatory efforts to develop the corporate bond market in India, international financial institutions have been permitted to float masala bonds overseas to deepen the offshore rupee bond market to augment financing sources.
- Establishing best practices: Multilateral agencies, through the provision of technical assistance, can help in leveraging international expertise in structuring new investment portfolios and creating local institutional capacity to deal with the ever-evolving requirements of the infrastructure sector. Stable sources of external financing will not only relieve the pressure on the domestic financial system but will also bring in the much-needed technical expertise, which is critical in enhancing the viability and competitiveness of infrastructure projects.
- Better information on sector challenges: Since transactions with multilaterals involve some level of government participation, this enables the former to apprise the latter of the challenges in various sectors and, at the same time, apply their global experience and technical expertise to overcome financial, operational and political challenges.
- Sustainable infrastructure development: International funding agencies have rigorous guidelines for addressing environmental concerns. This nudges companies to structure their projects so as to fulfil the environment criteria while availing of infrastructure finance.
Key risks
International funding agencies have stringent due diligence procedures for extending financial assistance. These are often too cumbersome to be acceptable to infrastructure firms as projects need to fulfil far too many conditions. Moreover, these agencies also insist on the monitoring of projects through their own channels. Multilaterals fund infrastructure projects predominantly through hard currency loans. However, due to the nature of the international floating exchange rate regime, these loans create currency risks, which result in uncertainty and potential additional liabilities for recipient countries.
Conclusion
Multilateral agencies act as catalysts in attracting initial funding from the private sector. The transparency of their project evaluation procedures and their ability to benchmark an individual private sector project in a particular country against international experience of similar projects can help avoid controversies that may otherwise arise. Going forward, it is essential to maintain policy stability across all infrastructure sectors to ensure the availability of low-cost, long-term debt from these agencies. Regular project allotment and timely fund and subsidy disbursement will enable lenders to commit to investing in the sector.