4.7. Special nature of infrastructure financing need

Infrastructure financing needs investments over a much longer period than for commercial loans. However, typical commercial lenders find it difficult to work with long-term investments, e.g., on the order of 20 to 30 years. The capital markets are most suitable sources for long-term investments in the infrastructure sector (for the supply of both equity and debt). Thus, a successful capital market is very helpful for a thriving PPP programme in a country.

Many countries have established special financing institutions to meet the long-term debt financing needs for their infrastructure sectors. Public-private partnership projects awarded to private companies for development, financing and construction receive priority for financing from such institutions. Another important role such financing institutions playing is the refinancing of those private sector projects initially financed by banks, which find long-term financing for infrastructure projects difficult. See box below for examples of such institutions established in India.

It may be mentioned here that in countries with large PPP programmes, unlike in the past, domestic financing has become more common than foreign investment. This trend is expected to continue in the future. This has made establishment of special infrastructure financing institutions, and development of domestic capital market and innovative financial instruments more important. One major advantage of domestic financing is that it reduces the risks due to fluctuation of the local currency. It also reduces country's obligation to allow repatriation of capital and profit.

IDevice Icon Example: Special infrastructure-financing institutions in India

India has established special institutions that mobilize funds from domestic and international capital markets for the financing of infrastructure projects. The Infrastructure Development Finance Corporation (IDFC) established in 1997 with the participation of the Government of India, the World Bank, KfW, IPEX-Bank and several commercial banks in India, provides long-term loans and guarantees for public and private sector infrastructure projects.

In a separate initiative, in January 2006 the Government of India established a wholly Government-owned company called the India Infrastructure Finance Company Limited (IIFCL).

Copyright © 2008 by Transport Policy and Development Section, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).