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The ASSOCHAM Infrastructure Committee, chaired by Dr. Rajiv B Lall, MD & CEO, Infrastructure Development Finance Company (IDFC), indicates that domestic savings need to be supplemented by foreign equity of US$ 5-7 billion per year in infrastructure.

Commenting on the ASSOCHAM recommendations, its President, Mr. Anil K. Agarwal said, “In addition, targeted access to long term debt finance from overseas would help. As for intermediation, the Committee observed that even though the bank credit to infrastructure has been growing rapidly, it would be neither feasible nor desirable for banks to finance the bulk of incremental financing needs. Therefore, the role of long-term financing institutions such as insurance companies, provident and pension funds and NBFCs has to be enhanced.  To do so, the corporate bond market needs to be strengthened by implementing the Patil Committee recommendations expeditiously”.

Mr. Agarwal also added that priority needs to be given to the development of a market for securitized assets. Some liberalization is necessary in the investment guidelines of these institutions, matched by greater reliance on the judgment of the Boards managing them.

Mr. Rajiv Lall said, “in policy and regulation, the committee focused its attention primarily on road, urban and power sectors, while acknowledging the Government’s increasing commitment to establish clear and stable regimes in all infrastructure sectors. In the road sector, the Committee noted that the state highways--which constitute 4 percent of road network, but carry 40 percent of traffic—are grossly under-funded and recommended that the facilitating framework created by Madhya Pradesh should be replicated in other states". The key components of the Madhya Pradesh model include a special legislation for state highways, a master-plan (including a comprehensive database, a schedule for implementation based on prioritization and identification of corridors for PPPs) and creation of a state highway authority. The Central Government needs to play a more active role in steering development of state highways and formulating a common framework.

The Infrastructure Committee of ASSOCHAM has identified some initiatives that would strengthen the three pillars of infrastructure: availability of long-term finance, policy and regulatory frameworks and capacity to implement those frameworks, said Mr. Lall.

In the urban sector, it was noted that fiscal autonomy of urban local bodies is critical for efficient delivery of urban infrastructure services and that to promote autonomy, there is a need for a new (own) tax for ULBs.  The Committee recommended the introduction of a Local Benefit Tax (say 1 % of the sales turnover at the final stage), while reiterating the need to continue with the ongoing property tax reforms.  The new tax would piggyback on VAT and would not require any new skills, manpower or rules on the part of urban local bodies. While boosting the revenue of all local bodies significantly, the new tax would help JNNURM cities to meet their financial obligations for availing JNNURM projects. Further, there is a need to create specialized nodal units for the urban infrastructure in every state, which would act as repository of scarce project development skills and help small local bodies to access capital markets through pooled financing. Appropriate lessons can be learnt from TNUDF in this regard.

Mr. Agarwal said that in the power sector, the Committee noted that although the legal, policy and regulatory frameworks are already in place, the implementation issues have not been adequately addressed.  Payment security is still a major constraint to financial closure of large projects, underscoring the need for accelerated distribution reforms with accent on private sector participation. On the fuel front, the Committee recommended expeditious development of coal resources and creation of a clear framework for privatization of coal mines for use in power generation.  As regards rural electrification, the committee noted with concern that the problem of groundwater depletion can potentially become more widespread if the current program to expand rural access to power becomes successful, unless the institutional problems relating to groundwater extraction are expeditiously addressed.

While the so-called public sector functions are becoming more open to private sector participation, actual transfer has been slow.  In many cases, this has been due to the lack of capacity in the public sector to implement new frameworks. To provide hand-holding to state government departments on a continuous basis, cross-sectoral PPP units need to be set up at the state level in every state. They would be responsible for: disseminating lessons and experiences across sectors, improving the quality of PPPs by making available better transactions skills, and assisting in inter-departmental coordination.  The Central Government should provide financial and technical assistance to states to set up these units.

Further, managers in public sector organizations (at different levels) need to be trained and sensitized to more effectively design, assess, market and execute viable PPP projects. One way of implementing the training process is through government funding of specialized PPP programs in the top training and academic institutions in the country. The other alternative is to have dedicated institutes that could be the subsidiaries of leading infrastructure financing companies.  These institutes would have the advantage of accumulated domain knowledge (in private financing) and well-developed relationships (with both government entities and prominent private sector sponsors) of their parent companies.