Why is financing important?
Financing
is the act of providing funds for the development and growth of a business. A
company acquires funds for the simple reason of increasing its capacity to
spend on its requirements viz. machinery, raw materials, man power etc. The
company in this sense increases its working capacity and improves upon its existing
operations leading to better working margins. This in turn leads to a higher
return on investment for the investors and therefore a better position for
company as well. Thus it is a win-win situation for both the investors and the
company. However, there are many factors one must consider before investing so
as to analyse the level of risk and the expectancy of their returns.
Infrastructure financing
Infrastructure
is the basic entity that allows a country or economy to function. Examples of
infrastructure include transportation (roads, railways, ports, and airports),
telecommunication, water resources, agriculture, energy etc. There is a need
for large and continuing amount of investments in almost all areas of
infrastructure in India as well as in the whole world. The main question here
is “Who” will finance these projects and “How” will these projects get
financed. In the past government used to finance these projects as these
projects benefitted the entire population of the country and were also used to
implement and maintain them throughout. But with the world economy changing so
rapidly there is a definite need to externally finance these projects as
government financing may not be the best and efficient way in the longer run.
Taking care of the environment
The
thing to keep in mind is that large infrastructure projects can have substantial
social and environmental impacts in the form of cutting of trees, exploitation
of natural resources, relocation of people and construction related impacts on
the environment. We have to ensure that people and environment are not being
harmed as a result of this financing. Government environmental and social
safeguard policies contain provisions to address these impacts. However the
areas where it is not possible to avoid impacts, mitigation measures are
designed and implemented in a sustainable manner.
Foreign Investments in
Infrastructure Need Encouragement
The
Government of India has been emphasising on the need for increased FIIs for the
forthcoming years and has also eased the regulations for the same. We need to
understand that a developing country like India stands to gain from these FIIs
coming in from other developing and developed nations.
However
it does not mean that the developed countries will comparatively gain less from
these investments. It is a matter of inclusive growth and provision of
sustainable development of infrastructure requirements of nations. The growth
rate for developing nations like India and China stand at a commendable
position and it would be in the benefit of the foreign investors to invest in their
projects that ensure a growth rate of the projected magnitude. These
investments act as a safe parking spot for their money.
The
areas where these developed countries require investments can be different to
the ones of the developing nations. The developed countries which have a good
network of underlying infrastructure viz. road and rail networks, water
resources, energy tapping infrastructure etc. also require an increase in the
infrastructure investments for future benefits. They can therefore enter into
mutual agreements and invest in those infrastructure projects in which
developing countries have comparative advantage over them. By entering into
such an agreement it can be a win-win situation for both of them.
For
example, India has high requirement of infrastructure development in road and
energy sectors and country X is efficient in both the sectors. Now the country
X has an absolute advantage over India, however when opportunity costs are
considered India has a comparative advantage over country X.
Now
going by the theory of absolute and comparative advantage both countries stand
to gain. They would enter into a mutual investment of projects that they are
comparatively superior in leading to a benefit for both the nations.
Also
the countries can use the Signalling Information for their benefit and gain
from the Infrastructure Financing.
Other sources of infrastructure
financing
Apart
from foreign investments financing for infrastructure needs can be effectively
done through PPP (Public Private Partnerships). In such models large private
players invest in projects through which they ensure a long term profitable
payback for themselves. In health sector PPPs exist from more than two decades.
Creating an Infrastructure Bank is
the Solution
As
Fahrholz (2001) said that “the infrastructure financing needs of developing
countries were going to run into the trillions of dollars over the next few
decades and public institutions alone would not be able to pick up the tab”. To
compete, they must build a competitive infrastructure in a matter of years. The
solution to this problem is the creation of the Infrastructure banks in the
developing countries. Almost every country in the
world benefits from an infrastructure bank to attract the large-scale private
capital that is essential to financing domestic economic self-sufficiency,
competitiveness, and resiliency. The world today stands at an important
crossroads. Infrastructure Banks can contribute to solutions in a difficult
time. But the countries cannot rely upon these institutions alone to pay for
necessary investments; “Innovative Finance” can surely contribute along with
Infrastructure banks for sustainable development. Financial Innovation can be
grouped as new products, new services, new production processes or new
organizational forms. Of course, if a new intermediate product or service is
created and used by financial service firms, it will help in the overall
development of the nation.
Submitted By:
Ayush Deep
Vaibhav Garg
2nd Prize winners of Article writing Competition, held across B-Schools
IMI Delhi
