Smoothen regulatory bumps on infrastructure highway: IFC to India

November 26, 2013

TORONTO: The International Finance Corporation, the World Bank’s private sector financing arm that recently concluded its first-ever global issue of rupee-linked bonds, has urged India to simplify its complex regulatory landscape and aggressively tap domestic investors to finance its massive infrastructure building plans instead of relying on foreign capital.

“In India, the most recent (spate of economic tumult) or what I call a ‘mini-crisis’, has triggered some soul searching in the  .. in the government,” said IFC CEO and executive vice president Jin-Yong Cai. “India is trying to do the right thing and build up infrastructure. It is really about how to deal with the complex regulatory framework.”

Jin-Yong, who headed Goldman Sachs’s China business before joining the IFC last year, said there is a lot of interest among global investors about opportunities in India, citing the success of the first tranche of offshore rupee bonds worth $160 million issued by the corporation last week.

“We just launched rupee-linked bonds for investing in India as part of a $1-billion programme, which saw strong subscription interest from investors,” he told an audience of large infrastructure investors and financiers at the national conference on Public Private Partnerships (PPPs) hosted by the Canadian Council for PPPs last week.Warning that the current situation of cheap global capital flows won’t last forever, he said India must develop capital markets and harness local saving for its trillion-dollar infrastructure development agenda “In terms of financing those (infrastructure) transactions, they want to bring in foreign capital. But the best way to mitigate the financial risk more often is to mobilise local capital (which) India has a lot of,” Jin-Yong said. 

While the huge amount of global liquidity and cheap capital flows provided a window of opportunity for countries such as India looking to build infrastructure, the IFC CEO said it could also be great risk – as was evident from the adverse impact on emerging markets in recent months due to speculation about the US Federal Reserve’s tapering strategy.

“When you have cheap capital, you think the good days will continue but it’s a time to put your house in order. If the government doesn’t  do the necessary reforms and develop local capital markets, I’m not too sure over-issuing long-term debt is a good thing, particularly if you over-borrow from foreign currencies,” he said.

Inadequate infrastructure is the main factor that holds back economic development and blunts poverty alleviation efforts in emerging markets such as India, he said. But fears over regulatory risk and political instability keep global investors away from infrastructure projects, Jin-Yong said

“Political leadership is clearly a prerequisite for successful PPPs. This is where institutions like the IFC and World Bank can play a critical role in advising and influencing governments to ensure that an equal system is worked out where investors benefit along with the people,” he said.

India accounted for $4.5 billion of IFC’s committed investment portfolio as of June this year, higher than any other country. In 2013, the corporation invested $1.38 billion in Indian ventures.

“The shortage of capital in developing countries is unimaginable and for them, using PPP is not an option – it’s a must,” he said, explaining why PPPs form part of IFC’s core approach to addressing the global infrastructure deficit.

The IFC has a portfolio of more than 100 infrastructure projects built on a PPP basis in 50 countries, and its equity investments in such projects have delivered over 20% returns in the last 10 years.
“The actual risk may not be as high as perceived, especially if you are involved in critical infrastructure creation,” he said. “The government will worry as one bad experience will mean other investors won’t come there,” he concluded.

(This  was in Toronto at the invitation of the government of Canada)



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