Industry Analysis - Infrastructure Finance

7/25/2019 Industry Analysis - Infrastructure Finance

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ANALYSIS OF INDUSTRY ENVIRONMENT

INFRASTRUCTURE

FINANCE

Under the guidance of

Professor K G Sahadevan

Course name: International Business Environment

Su!"##ed $%

Jatin Mongia (PGP313!"

#ohit Ban$a (PGP31%&'"

ection G

DECLARATION%

)e* Jatin Mongia and #ohit Ban$a do here+, declare that the re-ort is our .oint effort and that no

-art of the re-ort is co-ied from -u+lished/un-u+lished sources 0ithout -ro-er citation


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Ta&e of Con#en#s

Introduction3

Infrastructure: 2he Gro0th river3

4inancing Infrastructure: Bridging the Ga-%

Changes in the industr, -ost the 155&s%

Porter6s five forces anal,sis'

Intensit, of rivalr, among e7isting com-etitors:'

2hreat of ne0 entrants:8

Bargaining -o0er of +u,ers:

Bargaining -o0er of su--liers:!

2hreat of u+stitute -roducts and ervices:!

Infrastructure* 4inance* and 4iscal Prudence5

Challenges of de+t financing11

#eferences13

L"s# of F"'ures

4igure 1: 9et 0orth Infrastructure 4inance ervices Industr, (; change"'

4igure


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Introduction2he International Monetar, 4und* in its Jul,


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have also em-hasised the role of -u+lic investment regarding cro0ding in -rivate investments in

different sectors and enhancing the overall out-ut

2he infrastructure ga- that e7ists in India cannot +e ignored India is graded !th out of 1%!

countries for its infrastructure in the )orld Economic 4orum6s International Com-etitiveness #e-ort


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U


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Figure !: "acuation of the ##I Inde$

S#ron' e*"# arr"ers% 2he e7it +arriers in the industr, are high due to the high escalation of

commitments to the given -ro.ects* and hence the investors sta, invested for long durationsof time and hence cannot +ac$ out easil,

Re/ards of su((essfu& s#ra#e'"( re/ards% 2he infrastructure ga- that is e7isting in India is

enormous =round 88 -ercent of the freight and !' -ercent of -assengers in India are still to

+e trans-orted +, the road net0or$ 2o match the gro0ing reuirements of the Indian

econom,* the investments that are reuired are humungous 2he total investment in

infrastructure* 0hich stood at '&< -ercent and igh0a,s net0or$ is of fourlane* '3 -ercent +eing t0olaneand the rest 1 -ercent +eing single high0a,s 2he -o0er sector suffers from a deficit of 1%

-ercent and energ, shortage of 11 -ercent ervicing and financing such industr, 0ouldreuire ver, high ca-ital* even to -rocure the initial -ro.ects

&eguations:2o mo+ilise -rivate investment at the -ace and scale necessar,* the Government

of India initiated measures to create an ena+ling frame0or$ to attract -rivate ca-ital toinfrastructure -ro.ects = com-rehensive architecture 0as* therefore* +rought to effect to

-romote Pu+lic Private Partnershi- (PPP" in sectors li$e -o0er* high0a,s* -orts* air-orts andrail0a,s 2he o+.ective of the government 0as to secure o-timal sharing of ris$s and

re0ards 0hile ensuring +an$a+ilit, of the -ro.ects alongside the efficient deliver, of servicesat economic costs* 0hich should +e determined through a trans-arent and com-etitive -rocess


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of selection 2he Economic Intelligence Unit (EIU"* Economist (U" commended this PPParchitecture and rated it among the +est* +, international standards 2he standardiation of

-rocesses hel-ed in a ra-id roll out of PPP -ro.ects* 0hich caused India +eing recognied asthe largest reci-ient of PPP investments during


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Suppliersto InfraFin co.

Fundsfrom FDs

SBA loansCapitalMarket

Convertible bonds

Renancefrom NHB

Bargaining -o0er of su--liers:Aet6s first loo$ at the su--liers to this industr,L it 0ould +e some means through 0hich the financiers

-rocure their cash 2he follo0ing are some of the su--l,ing means to the industr,

4s* B=* Ca-ital Mar$ets and +onds are the most relia+le sources of su--l, to the financier ucho-tions are generall, interest income +ased and the rede-lo,ed -rinci-al in the Infrastructure 4inanceindustr, for investing into their clients6 -ro.ects 4or commercial +an$s* 4i7ed de-osits can -rove to

+e the ma.or source for funding their -ro.ects as one of the im-ortant feature of 4s are the, costver, lo0 interest to +an$s

I!1or#an(e of #he "ndus#r$ #o su11&"er5s 1rodu(#% Investment can +e made in other industries too+, the su--liers* +ut if an o--ortunit, is -resented in term of an Infrastructural finance manner* it0on6t hold much value given the -otential and hence this factor contri+utes little to the +argaining

-o0er

)ith multi-le financing o-tions* and the given o--ortunities* su--liers have lo0 +argaining -o0erover infrastructure financing institutions

2hreat of u+stitute -roducts and ervices:trict su+stitutes to the industr, don6t e7ist right no0 2hough* the customers can a--roachcommunit,+ased organiation and >Gs as the, have much sim-ler and via+le -olicies* +ut can lagon the account of the ca-ital +eing su--lied to the industr, o 0e right no0 can safel, -resume thatthe threat of su+stitute services is ver, lo0* as the u-coming -ro.ects in the tra, of Infrastructure4inance 0ill +e reuiring humongous ca-ital

But* as 0e $no0* Porter6s forces are not static* do0n the line* the threat of su+stitutes is said to rise2he =IIB (=sian Infrastructure Investment Ban$"* other international and national fora,s into theindustries can -rove to +e a tough nut to crac$ 2he, could -rovide 0e##er Co!!er("a& Ter!s6Read"&$ Ava"&a&e serv"(es60hich could +e cou-led 0ith attractive -ricing and lo0 s0itching coststo give com-etition to the Infrastructure 4inance Industr, =nd hence it7 is advisa+le that right no0is the time to enter the industr,* the later it gets* the more difficult it 0ould +e* once such institutionscome into their fulls0inging mode

Figure 4: Bargaining power of suppliers


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New entrants

Substitutes

nter!rmSuppliers

Bu"ers

#

$

%

Infrastructure nance industry

nfrastructure nance

Attractive ndustr"

Figure : Infrastructure finance industry

Infrastructure* 4inance* and 4iscal Prudence4or an emerging econom,* the l,nch-in of gro0th is the investment 4ortunatel, India* having

historicall, +een a nation that saved and invested little* has no0 transformed itself into a ma.or saver

and investor 2he aggregate savings rate (that is savings as a -ercentage of GP" crossed the 3& -er

cent mar$ in


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come 2he sur-lus generated can +e used to increase our gross enrollment ratio Providing higher

education to the 0orld 0ill also enhance the nation@s glo+al stature ince this is a financiall, via+le

o-eration* all government needs to do is to give educational institutes autonom,* including regarding

fees and salaries* and then allo0 -rivate investment into the arena It 0ill also have to 0or$ on some

nuts and +olts measures such as having -rovision for foreign students to get four,ear visas at one

go 2here 0ill* of course* have to +e a regulator, frame0or$ 0ithin 0hich this 0or$s* so that

students are not misinformed or cheated and do not face midcourse increases in fees It@s li$e a

resource that is l,ing unused on the ground )ith the right ena+ling rules* 0e can create huge returns

and +oost our higher education and research sector

#eturning to the su+.ect of infrastructure* one -ro+lem is that these are usuall, such large -ro.ects

and also have such long gestation +efore the, +ecome financiall, via+le that most entre-reneurs

0ould have to find agents 0illing to invest mone,* such as angel investors and venture ca-italists

+efore the, can start u- hould government get involved in +oosting and channeliing -rivatesector

mone, for this or should it follo0 a handsoff -olic, hould the government give guarantees or

comfort letters to investors tr,ing to decide 0hether to -ut their mone, in infrastructure It is $no0nthat such assurances greatl, facilitate investment +, reassuring the investor* +ut the, also -lace

res-onsi+ilit, on the government* +ecause if there is a default* the government has an o+ligation to

ste- in It is one of the areas 0hich have +een heavil, de+ated internationall, )ith India a+out to

em+ar$ on +ig infrastructural -ro.ects* the de+ate has come to our doorste- 2o loo$ a0a, from it

0ill mean a decision +, default

ome of the rec$less governments* 0hile tr,ing to ta$e large investment -ro.ects* gave a guarantee to

the investors that if the -ro.ect goes +an$ru-t* the government 0ill -a, off to them 4rom our -ast

e7-eriences 0e $no0 that 0hen a government* having an a+ilit, to -rint mone,* gives a guarantee*

there 0ill +e investors galore to -ut their mone, in -ro.ects >o0ever* this might not +e a -articularl,

useful strateg, for the government as giving such a guarantee 0ill not add an,thing to thegovernment@s financial num+ers immediatel,* +ut it amounts to underta$ing future financial

e7-enditure =nd since there is al0a,s the -ro+a+ilit, that such a guaranteed -ro.ect 0ill fail in the

coming future* so each such guarantee amounts to some -articular additional e7-ected e7-enditure

+, the government in the future =nd hence* such assurances* given rec$lessl,* ma, lead to

unsustaina+le fiscal deficits shortl, 0ith all their attendant -ro+lems* li$e inflation* colla-se in

investment* and* ultimatel,* economic recession 4or this reason* under the 4iscal #es-onsi+ilit, and

Budget Management =ct ence* it is an argument that has direct relevance to India 2he gist of

the argument is sur-risingl, sim-le and is outlined in +elo0

Do"n' 0e##er $ Coord"na#"on =mong infrastructural -ro.ects* there is t,-icall, a lot of -ositive

e7ternalit, 2he ne0 road 0hich 0ill +e o-erated +, a toll s,stem 0ill +e more successful 0hen the

residential to0nshi- to0ards the end of the road is com-leted* and the develo-er 9IA the su+ur+an

to0n is more li$el, to +e successful if the road gets +uilt 2he government* +, giving some carefull,

orchestrated guarantees to investors* can ensure that all these -ro.ects are started u-* there+, raisingthe -ro+a+ilit, of success for each of these -ro.ects ?f course* if the, all fail* that 0ill +e a more


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significant failure But that -recisel, is the dilemma 2o assume that there is no dilemma and to +e

0edded to one of these o-tions +, ha+it is clearl, no solution 2o illustrate this 0ith a sim-le

arithmetic e7am-le* su--ose there are three -ro.ects* a+out a road* a to0nshi-* and a -o0er -ro.ect

Each entails an initial cost of 1&& If the -ro.ect succeeds* it ,ields 1'&L if it fails* the entire initial

cost goes unrecovered If all three -ro.ects are underta$en* each -ro.ect is more li$el, to succeed*

+ecause of the $ind of -ositive e7ternalit, mentionedL let us su--ose that the -ro+a+ilit, of success

of each -ro.ect* 0hen the other t0o are im-lemented* is &5' If* on the other hand* the other t0o are

not -erformed* then assume the -ro.ect that is im-lemented has a -ro+a+ilit, of success eual to &'

If the government gives a guarantee to the investor for a -ro.ect* then for an investor it is 0orth0hile

investing in the -ro.ect* since she incurs no ris$ of default In the event of a default* the government

-a,s off the investor the 1&& that she had invested u--ose no0 government gives a guarantee to

onl, one -ro.ect =ssuming that the other -ro.ects are not underta$en under the circumstances* there

is an e7-ected loss of '& units of mone, to the government* since the -ro+a+ilit, of failure is half and

if a failure is 0itnessed* the government has to -a, the investor 1&& >ence* the e7-ected fiscal

deficit rises +, '& 9o0 su--ose Government gives guarantees to all three -ro.ects* then all three

-ro.ects get im-lementedL and the Government@s e7-ected financial cost of this is onl, 1' (N 3 O &&'O 1&&"* since there are three -ro.ects* each -ro.ect has &&' -ro+a+ilit, of failure and* in the event of

a -ro.ect@s failure* government has to -a, 1&& units of mone, If these -ro.ects create sociall,

valua+le 0ealth* 0hich is 0orth more than 1' units of mone,* it is argua+le that guarantees to all

three are desira+leL even though it ma, not +e 0orth0hile giving a guarantee to an, single -ro.ect

2his sim-le arithmetic is not a reason to rush and give out guarantees or even comfort letters

(comfort letters often* in effect* turn out to +e li$e safeguards in the e,es of the la0" +ut it alerts us to

the fact that for a nation on the verge of ta$eoff* and 0ith com-lementarities +et0een -ro.ects* the

calculus of guarantees and fiscal deficits is not straightfor0ard )e should evaluate the +enefits and

financial costs of government tr,ing to give a +ig coordinated -ush to a cluster of infrastructural

-ro.ects* and recognie that the costs and +enefits 0ould not +e the same if 0e 0or$ed this out foreach -ro.ect se-aratel, and then .ust added them u-

Challenges of de+t financing?ne of the main challenges in +ringing u- -rivate investment 0as the mo+ilisation of de+t financing for

meeting the high targets set +, the Government =s the PPP -ro.ects are usuall, financed on a 3: ratio of

euit, and de+t* mo+ilisation of the reuired de+t resources seemed a challenging tas$ Moreover*

infrastructure -ro.ects often +ear a long -eriod of maturation* 0hich needs to +e su--orted +, de+t of a longer

tenure Unavaila+ilit, of longterm de+t from local financial institutions* therefore* -osed an additional

challenge for sustaina+le financing of the PPP -ro.ects

Unli$e the develo-ed countries* 0here longterm de+t can +e mo+ilised from the ca-ital mar$ets* the +ondmar$et in India did not -resent such an o-tion as it 0as characterised +, a lac$ of liuidit, and de-th Aisted

cor-orate de+t formed onl, t0o -ercent of GP* 0hich 0as significantl, lo0er as com-ared to other emerging

economies* such as Mala,sia* orea and China 4urther* uasigovernment entities li$e +an$s* -u+lic sector

oil com-anies and governments-onsored financial institutions have remained the -rinci-al issuers in the

cor-orate de+t mar$et* leaving virtuall, no a--etite for ne0 infrastructure -ro.ects that are -erceived as ris$

-rone =s a result* there 0as little -ossi+ilit, of rel,ing on the +ond mar$et for financing infrastructure

-ro.ects

Insurance and -ension funds* 0hich are also a source of longtenure de+t in the develo-ed economies* offered

a limited 0indo0 in India* -rimaril, due to various regulator, reuirements associated 0ith ris$ mitigation

=s a result* these funds 0ere not availa+le for the -ecial Pur-ose ehicles t,-icall, used for im-lementing


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infrastructure -ro.ects Moreover* insurance and -ension funds in India 0ere heavil, invested in government

securities 0hich 0ere difficult to dis-lace

4oreign de+t* a com-arativel, chea-er o-tion as com-ared to domestic +orro0ings* -rovided a limited el+o0

room for infrastructure com-anies* given the limits im-osed +, the Central Ban$ on e7ternal commercial

+orro0ings to (or Hintending to" -reventing e7cessive ca-ital inflo0s in order to maintain macroeconomic

sta+ilit,

In the a+ove scenario* commercial +an$s and non+an$ing financial institutions +ecame the -rinci-al source of

de+t funds for infrastructure -ro.ects >o0ever* the +an$s faced their constraints arising from the nature of

their asset +ase* 0hich -rimaril, consists of short to medium term de-osits 2his im-lied a -otential asset

lia+ilit, mismatch in lending for the long term Moreover* +an$s also lac$ed the e7-erience and ca-acit, to

underta$e limited recourse financing of infrastructure -ro.ects that t,-icall, do not -rovide much collateral

securit, ince the securit, for such de+t -rimaril, com-rises the e7-ected revenue streams of the res-ective

-ro.ects* commercial +an$s 0ere unli$el, to sho0 much a--etite for such lending

Given the various constraints* there 0as an urgent need to evolve and introduce an intervention that 0ould

ena+le mo+ilisation of longterm de+t for PPP -ro.ects in different infrastructure sectors Governmentintervention had also +ecome necessar, since the availa+le sources of finance offered a limited sco-e for

e7-ansion )ithout such an initiative* there 0as ever, -ossi+ilit, of a significant shortfall in the -ro.ected

investment for infrastructure


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#eferences htt-://+logs0orld+an$org/---s/innovativefinancingcaseindiainfrastructurefinance

com-an,

htt-s://r+iorgin/cri-ts/BQ-eechesie0as-7IdN58!

htt-://industr,outloo$cmiecom/$ommon/+in/sr-h-

$allN0sho0ta+FicodeN&1&

Industry Analysis - Infrastructure Finance

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