2. Prevalent Challenges in the sector

   1. Lack of Funding

Infrastructure projects are long gestation period projects and need financing with tenures ranging from five to twenty five years. Arranging funding with such long tenures is a challenge. In developing countries such as India, typical sources of infrastructure finance have been commercial banks. For commercial banks, major source of finance has been short to medium term customer deposits. Therefore, banks are constrained by the ALM issues to provide long term financing to infrastructure Projects.

2. Guarantee of Cash Flows

In developing countries, post the global financial crisis, the infrastructure projects that were poorly prepared have defaulted on generating adequate cash flows to meet their debt service requirements. Therefore, internationally, none of the financiers are willing to provide funding to infrastructure projects without guarantees from the sovereign, and in some cases without the sovereign guarantee backed by guarantees from multilateral agencies.

3. Forex Risk

Another issue with infrastructure financing particularly for Foreign investor is that infrastructure projects generate revenues and hence cash inflows in domestic currency. Therefore, if funding is raised from multilateral agencies or Foreign investor denominated in foreign currency, the risk of fluctuations in foreign currency becomes an issue as the debt service payments are to be made in foreign currency.

4. Macro-economic Variables

Other Variables such as Global Economic Crisis, Lack of Regulatory & Policy Framework, non- availability of Sound Financial & Banking system, Political Environment of the country which disrupts the generation of Cash Flow for an Infrastructure Project.

3. Solutions to the Challenges

   1. Making Funding Available

By attracting financing from institutional investors such as pension funds and insurance companies. However, these institutional investors have regulatory constraints of investing in assets/ securities that have at least investment grade credit rating. Majority of infrastructure projects fall short of investment grade credit rating due to their risk profile. Therefore, the institutional investors as pension funds and insurance companies are not able to invest in infrastructure projects. The solution to this problem is creating credit enhancement mechanisms to improve creditworthiness of infrastructure projects as guarantee mechanisms.

2. Adequacy in Cash Flow

Solution to this problem is to ensure adequate project preparation by implementing agencies to ensure that only bankable PPPs backed by robust demand assessments are brought to the market

3. Forex Risk Mitigation

At the National Government level, the sovereign bears this currency fluctuation risk as it has a natural hedge from the various import and export transactions.

4. Macro-economic Variables

Government can provide guarantee of Cash Flow to private builders/operators. For instance, Annuity based PPP Infrastructure Project or bringing third party as an Insurer to the agreement

Case Study 1: Alandur Sewerage Project

Introduction

The Alandur Sewerage Project (ASP) was initiated in the year 1996 by the Chairman of the Alandur Municipality (AM). AM, located adjacent to Chennai, forms a part of the Chennai Metropolitan Area. Prior to 1996, the town did not have an underground sewerage system and all sewage was managed with individual septic tanks. The largely unregulated disposal of sewage in storm water drains was an environmental and health concern for the local residents and was frequently raised as a political issue. Around 98% of 19,800 households used either septic tanks or holding tanks collected periodically by tankers and disposed in the low-lying areas outside the municipal limits.