Pinnacle

The proposed Citigroup-IDFC fund signals the newfound confidence of global financial capital in the commercial viability of building infrastructure in India. The country’s policy managers have been hardselling the Indian infrastructure story to both domestic and foreign private capital for quite some time. In the domestic arena, the public-private partnership (PPP) model is being aggressively promoted.

Global roadshows have been conducted recently to attract capital from abroad. These efforts had met with only modest success so far and the proposed fund is the first sign of a real break.

Even its staunch supporters would privately admit that the PPP model has not really taken off, except for few areas like roads and, to a certain extent, urban infrastructure. The PPP route is being used mainly for small projects, exposing its limitation in the present context, with the government estimating that investments of $350 billion is required in infrastructure in the next five years.

The problem is that the government intervention in the pricing of many infrastructure services — roads, ports, power generation and transmission, airports to name a few — continues upsetting the confidence of private capital. Measures such as viability gap funding has at best offered mere symptomatic relief, without a real solution for the problem, namely, uneconomic pricing of the services.

The finance ministry officials tell ET that the proposed fund to be spearheaded by Citigroup and IDFC could grow bigger in the next few years, although its initial size would be $5-billion. The idea is that Citigroup and IDFC will contribute $1 billion each in equity and simultaneously raise foreign currency debt of $3 billion. To begin with, Citigroup and IDFC will offer $100 million each to the fund soon.

The India Infrastructure Finance Company, the government-owned special purpose vehicle for core sector funding, will offer $25 million. Officials say that IIFCL, which is on a fund-raising mission on its own, could work in conjunction with the proposed fund, which will be managed in the private sector.

The projects selected for funding by IIFCL could benefit from the $3 billion debt, they say. The fund could make both equity and debt investments. Hybrid investments could be made even in a single project.

As said earlier, market-determined pricing of services is central to luring investors into the large core sector projects. The proposed fund, unlike the present PPP model, will focus on large projects. There are a few constraints that have to be done away with, the most important being dismantling of controls on pricing of infrastructure services. Already, there are signs of a directional shift towards this. But the action should be speeded.

The new toll policy for roads is being finalised. The proposed policy could increase the commercial viability of road projects. Likewise, the finance and shipping ministries and the Planning Commission are on course to reach a consensus on revising the tariff policy for ports to make it less rigorous for the operators. Officials say that current cost-plus tariff system for ports will be replaced by a new normative policy, which would see a larger influence of the market elements on tariffs.