Way ahead for sustainable financing in Indian Infrastructure

Sustainability is a mix of Social sustainability, Economic Sustainability and Environmental Sustainability

Social Sustainability is achieved by providing infrastructure services to the socially deprived sections. Viability Gap funding (VGF) which enables funding for projects which would not be economically feasible is a way ahead to achieve social sustainability. VGF is funded through money earned by Government from commercially viable projects through Negative funding. In Germany, a certain percentage of work in a project should be handled by socially deprived sections of the population. This kind of work allocation in India will develop the socially weak sections of Indian society.

Economic Sustainability is possible by New Public Management (NPM) principle of PPP where the private parties are encouraged to finance Infrastructure relieving the Government of fiscal deficit. An alternative funding source, Foreign Direct Investment (FDI) is subject to political and financial risks and FDI players are averse to invest in India. In such cases, developing the domestic finance market is the way to sustainable financing. Real Estate Investment Trusts (REITs) incentives and Infrastructure Investment Trust (INVIT) proposed in budget 2014 are welcome moves towards achieving sustainable funding in India.

Environmental sustainability can be achieved when banks adopt Equator Principles. A move in this direction was initiated by Infrastructure Development Finance Company (IDFC) in 2013 when it adopted the equator principle. IDFC is India’s leading finance player and the first to adopt Equator Principles. However, sustainable funding can be ensured only when all banks adopt them. Also, there should be banks which exclusively finance sustainable projects to speed up sustainable constructions in India. UK’s Green Investment Bank (GIB) lend to investors who work on renewable energy projects. Another way to go ahead is tie up with foreign institutions to learn from them. In 2014, India and German KfW Development bank signed loan agreements for sustainable development of Tamil Nadu towns.

References

1.    "IDFC" Sustainable Infrastructure Development and Environment Management. Web. 7 Nov. 2014. <http://www.idfc.com/our-firm/environment_management.htm>.

2.    The Greening of Infrastructure Finance, Insight magazine, Issue No. 2, Spring 2012

3.    German Embassy, New Delhi, 2014, “Germany India sign agreement for sustainable infrastructure development” <http://www.india.diplo.de/Vertretung/indien/en/__pr/Business__News/Kfw__2014.html>

Meeting the $1 trillion investment in infrastructure

                           AIIB which stands for Asian Infrastructure Investment Bank was launched last month on 24th october 2014. I think that this bank along with the BRICS bank would pose a major challenge to the Bretton woods twins the IMF and the world bank and it has possibility of boosting the growth rate in infrastructure in India.


World Bank:US dominated bank

• United States is discouraging the World Bank from lending to coal-based power projects in the asia.

IMF:Europe led bank

ADB(Asian development bank):Japan dominated bank

BRICS new development bank: 

• At least 25 per cent of our power generation capacity over the next decade is based on Chinese equipment import. This means roughly $30 billion (about Rs 180,000 crore) of power equipment could be imported from China. 
• The BRICS bank could also offer cheaper loans for such power projects in BRICS countries.

AIIB:

• Asian development bank lends not more than $10 billion a year while asia needs $800 billion of investment in infrastructure annually between now and 2020

Why this BRICS and AIIB are good for India?

• 12th Five year plan says we need $1 trillion dollar investment in infrastructure. Few billions dollars we get as ‘soft loan’ from AIIB, BRICS  bank  is help in achieving this plan.
• India is 2nd largest stakeholder in AIIB, so it has large voting power and help India in getting loans according to its interest
• Cheaper loans

reference:

http://www.rediff.com/news/column/how-brics-bank-can-affect-world-economics-and-politics/20140718.htm

http://www.livemint.com/Politics/tjdx86kAvM1Q9TjfAFyrFJ/China-launches-World-Banks-rival-AIIB-in-Asia.html?utm_source=copy