Infrastructure projects in emerging economies perceived vulnerable to risks

Infrastructure projects in emerging economies like India are perceived as vulnerable to risks and efforts must be made to introduce greater clarity in policy to reassure investors,the Reserve Bank has said.

Written by Agencies | Mumbai | Published: January 16, 2012 8:59 pm

Infrastructure projects in emerging economies like India are perceived as vulnerable to risks and efforts must be made to introduce greater clarity in policy to reassure investors,the Reserve Bank has said.

In the absence of proper risk mitigation mechanisms,the costs of infrastructure projects tend to increase and such high level of risks cannot be traded off against high returns,RBI Deputy Governor H R Khan said at the recent international conference on ‘Frontiers of Infrastructure Finance’. Khan’s speech was made available on the official RBI website today.

He said,”Infrastructure projects in developing countries like India are perceived as highly vulnerable to risks which constrains financing.

“The aim of the policy makers should be to reduce perceived risks by introducing greater policy clarity and,at the same time,providing an environment that will reassure investors.”

Khan said some of the notable risks that need to be reckoned with arise during the period of construction,leading to time and cost over-runs.

They also included operational risks and market risks besides interest rate,foreign exchange,payment,regulatory and political risks.

The Planning Commission has pegged investment of USD 1 trillion in the infrastructure sector during the 12th Five Year Plan period that will commence from April,of which half is targeted to come from private sector.

Khan said the government and the RBI have taken a number of steps to promote funding in the infrastructure sector.

They include enhancement of exposure norms,introduction of Credit Default Swaps (CDS) and liberalisation of the policy with regard to external commercial borrowings.

He added,however,that some more steps are necessary to increase fund flow to the sector — making infrastructure projects commercially viable,greater participation of state governments,improving efficiency of corporate bond markets and enhancing sovereign credit rating ceiling.

Khan said simplification of procedures by enabling single window clearance would also encourage funds in the sector.

He said,”Funding is the major problem for infrastructure financing and there are other issues which aggravate the problems of raising funds. These include legal disputes regarding land acquisition,delay in getting other clearances (leading to time and cost overruns) and linkages (coal,power,water) among others.

“It is felt that in respect of mega-projects,beyond certain cut-off point,single window clearance approach could cut down the implementation period.”

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