Seminar 2020
SPA New Delhi
The debtors who dabble with infrastructure, are usually private sector companies which specialise in the field. Making profits is their primary aim. They borrow money from the creditors as short term loans (eg. in the form of commercial papers for a period of 6-12 months). This is advantageous to them due to the low-interest rates. They invest this borrowed money in long-term projects at a higher interest rate, which gives them a high net income margin. In order to repay their debts, they have to roll over their liabilities by borrowing from another investor to repay an older debt. This is not prudent financing, for it leads to an asset-liability mismatch - borrowing short term and investing long term (Chanda, 2019). If creditors lose confidence in these debtors, they will not advance more loans, which will not allow them to roll over liabilities, and they shall default on loan repayments. Debt financing was first introduced during the redevelopment of Paris in the 1850s - The chapter “Paris” from the book The City in Mind: Notes on the Urban Condition, by James Kunstler (published in 2001), describes the effort that went into transforming the city of Paris from an unsanitary and dilapidated place to the beautiful and tranquil city the world cherishes today. The government’s treasury lacked the funds needed for full-scale city redevelopment. This was one among the many reasons why Georges Eugene Haussmann, the administrative chief of the empire, crafted the method of debt financing. The government’s procedures were tedious and slow and did not permit debt-financing. Therefore, Haussmann’s method was unauthorized and disguised. His system involved paying contractors in instalments with a proxy bond for a “completed” project, which in reality had not been started yet. These bonds were exchanged by them at the government’s mortgage bank for cash. This allowed Haussmann to circumvent the then government for authorization for any project. The system was made complicated to conceal the money trail back to him, and he was the sole authority raising credit for the projects in Paris (Kunstler, 2001, chap. Paris). Paris is one of the most successful and promising results of debt-financing for infrastructure projects. It can be observed, however, that the role of the government in this financial mechanism has evolved over time. From being oblivious and averse to deficit financing - they have imbibed it today into their economic models, and tax incentives make debt financing the preferred option for infrastructure financing. Moreover, governments today seize every opportunity to attract investments by the private sector, which are largely debt-financed. One seemingly remarkable method to attract international investments and develop world class infrastructure is to host international sporting events like the Olympics. Developing nations resort to these events in hopes of building the nation. However, it sometimes leads to more problems than solutions, like in the recent case of 6
