Gujarat, Madhya Pradesh, Bihar and Karnataka, the states that are pulling out all stops to increase infrastructure investment especially in the roads, ports and some categories of the power sector, are likely to be the most immediate political beneficiaries of a purely economic move by the Reserve Bank of India (RBI).

Last week the RBI announced that subject to certain conditions, loans to Public Private Partnership (PPP) projects in the infrastructure sector would be treated as secured loans. This means that the cost of financing these projects will come down, and going forward, bids would become lower, leading to more investment and more competition.

Earlier entreaties to the RBI by the Planning Commission, the Prime Minister’s Economic Advisory Council (PMEAC) and even the PMO itself had no effect.

The PMEAC chief C Rangarajan just three months ago, wrote to the RBI Governor D  Subbarao, asking him to relax prudential norms for the infrastructure sector amid orchestrated whines from investors that there was no way they could continue to keep up with banks’ high interest regime, still invest in the sector but hedge users from higher costs.

Last week, the RBI saw the logic of the Planning Commission’s suggestion that loans to the sector be treated as secured if the following conditions were met:

<sup>* User charges/toll/tariff payments are kept in an escrow account where senior lenders have priority over other withdrawals by the concessionaire

* There is sufficient risk mitigation in case project revenues are lower than anticipated, such as pre-determined increase in user charges or increase in the concession period

* The senior lenders have a right to substitution in case of concessionaire default

* The senior lenders have a right to trigger termination in case of default in debt service

* Upon termination the project authority has an obligation of compulsory buy out and repayment of debt due in a predetermined manner.</sup>

Road building is considered by state governments as an easy way to earn political merit. In Bihar and Madhya Pradesh, the USP of the state governments has been road-building.

Officials explained that the move will also enable the private sector to raise cheaper capital for some investors in the power sector.

22% of all infrastructure investment in the 10th Plan was financed by private capital. This went up to 37% in the 11th plan. To finance infrastructure projects amounting to Rs 1 trillion, at least half the money has to come via the private sector. 70% of all investment in infrastructure comes through debt.