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.
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
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
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.