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The requirement of capital for setting up infrastructure, a vital need for economic growth, has compelled the governments in the developing countries to open up their markets to global capital. However, the command economy structures, centralized planning, government control and bureaucratic systems that continue to be practiced in these countries are coming in the way of private investments.

In these markets, traditionally, the government is expected to set up infrastructure facilities for public. Large government owned companies and monopsonic utilities have been discharging this responsibility. Though in this environment, the governments, to some extent, were able to bring about capacity addition in the infrastructure facilities, due to the lack of market drivers, neither could existing investments be serviced nor the incremental capacities be set up. This led to poor return on investments and poor service to the consumer.

The process of privatisation in India is driven by the need of meeting the increasing demand and of mobilizing additional capital to set up the infrastructure for meeting this demand.

This environment has been found lacking in attributes that are fundamental to market economy, i.e., open access, fair play and competition. Attributes that are essential for protecting the interests of the consumers. Attempts to create an environment suitable for private investments have triggered the process of reform, restructuring and deregulation or independent regulation.

There are issues related to tariff fixation or toll charges; level playing field for both private and government entities and access to the market. In cases, where the government itself is a player e.g., power, roadways or telecom- it cannot set the rules or function as a neutral referee, from the consumers viewpoint and the viewpoint of the other private players.

There are two kinds of changes that were desirable. First, the changes related to deregulation- the movement towards market place. A movement, away from government controls and towards a greater reliance on market to deliver. It has become synonymous with privatization, competition and restructuring. It includes deregulation of government controlled sectors, private sector participation, divestment of and independence to government controlled companies and restructuring, unbundling and corporatization of the utilities.

The second change is related to disciplining of the market place, rules and regulations to protect the interests of the consumers and maintaining a level playing field.

Project Finance

The term "project finance" is generally used to refer to a nonrecourse or limited recourse financing structure in which debt, equity, and credit enhancement are combined for the construction and operation, or the refinancing, of a particular facility in a capital-intensive industry, in which lenders base credit appraisals on the projected revenues from the operation of the facility, rather than the general assets or the credit of the sponsor of the facility, and rely on the assets of the facility, including any revenue-producing contracts and other cash flow generated by the facility, as collateral for the debt.

In project financing, therefore, the debt terms are not based on the sponsor's credit support or on the value of the physical assets of the project. Rather, project performance, both technical and economic, is the nucleus of project finance.

The term project finance is often misused, owing to a general misunderstanding of the term. In some circles, it refers to raising funds to pay the costs of a project- any project. In others, the term is used to describe a hopeless financial situation remediable only with extreme financing options. The emerging meaning for the term is the definition above.

It is important to understand that the term project finance does not necessarily imply that the underlying debt is nonrecourse to the project sponsor. As the definition indicates, project finance debt can be nonrecourse or limited recourse. Project finance transactions can be placed on a continuum, with recourse to project sponsors ranging from nonrecourse to almost complete recourse. Complete recourse is a different financing technique, usually called direct lending.

Regulating the market place

Developments in the CIS countries over the last few years show that merely opting for market economy in absence of mechanisms to discipline the market can lead to chaos, placing the consumer at great disadvantage. While the market economy is believed to be successful in mature markets in the developed countries, its application to developing countries and emerging markets is being questioned largely due to the vulnerability of the consumer. This issue can only be addressed by independent regulation, which must accompany privatization and deregulation.

In India, in the wake of liberalisation in 1991, the initial response from private sector was overwhelming. Subsequently as the developers faced difficulties in securing finance, the progress slowed down. The government's policy towards private sector participation in its infrastructure development was seen as fundamentally flawed. In power sector the government opened up generation while it has been argued that the privatisation should have started with distribution. The telecom sector has had its share of controversies. Mid-course correction in the policies became a routine exercise rather than an exception. Therefore, in the power sector we had the Electricity Regulatory Bill in 1998 & then Electricty Act 2003, attempts to set up the Insurance Regulatory Authority earlier could not fructify and modification in the TRAI Act is called for to make the agency more effective.

It is, therefore, obvious that the regulatory issues have come to the fore at a later stage of privatisation. Over the last few years several regulatory agencies have come up. The Central Electricity Regulatory Commission (CERC), the State Electricity Regulatory Commissions (SERCs), Telecom Regulatory Authority of India (TRAI) and the Insurance Regulatory Authority of India (IRAI) are some of the examples. The agencies like the Central Electricity Authority (CEA), the Tariff Authority for Major Ports (TAMP), the National Highway Authority of India (NHAI), the Inland Waterways Authority of India (IWAI) and the Airport Authority of India (AAI) have also been discharging some of the regulatory functions along with their normal functions of advising the concerned ministries on policy making.

The issue of consumer choice is addressed only in a limited way. For example, in the case of cellular operators, the operators have been allotted specific geographic areas. The consumer has access to this service but he does not have the choice of say a dozen operators who offer this service on competing terms. In the power sector, while power can be generated by the Independent Power Producers (IPPs) in accordance with its PPA with the concerned electricity board, the consumer has no choice but to purchase electricity at the price fixed by the State Electricity Board (SEB). He can not opt for an alternative supplier, who may offer electricity at lower prices or with value addition in the terms of supply say, more credit, a free internet connection etc. Even a bulk consumer of electricity, a society or an energy intensive industry has no choice but to purchase electricity from the board.

 


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