INTRODUCTION

There are broadly two major sources of financing for infrastructure projects: public finance and private finance. The governments both at the central and provincial levels have been the major source of funding for infrastructure projects in developing countries like India. Plans for investment to various infrastructure sectors are undertaken by the governments through formal planning exercise wherein allocation of budget is done. The budgetary allocation is influenced to a great extent on the emphasis by the government to accelerate or promote growth in certain sectors which are categorized as high priority in the plan period.

Participation of private sector has been sought in various infrastructure sectors. Governments have adopted innovative procurement route like public private partnerships for involvement of private sector in the development of infrastructure projects. Private sector provides financing to infrastructure projects using a wide range of financial instruments. The chapter will discuss in details the funding of infrastructure using private finance.

PUBLIC FINANCE

The budgetary resources from government to fund the infrastructure projects come from two major categories of the sources: tax collection and public sector borrowings. Borrowings from the market are in the form of either government stock or bonds. The other source of revenue for the government is in the form of tax collection and duties besides aids and donation, though this form a small portion of public finance. Taxes are levied by governments on income, payroll, property, and goods and services. For instance, taxes and duties imposed by the government can be in the form of income tax, value added tax, vehicle excise duty, capital gains tax, custom duties and stamp duty. In addition to this, dedicated funds are also created by government for development of specific infrastructure sectors by imposing various types of duties. For example, a dedicated central road development fund has been created in India by charging a duty of INR 1 per litre of motor spirit and INR 1 per litre of high speed diesel oil. The proceeds from this fund are allocated for development of rural roads, development and maintenance of national highways and state highways.

Funding of the infrastructure projects is normally through the traditional route where the public finance is used to finance the activities of the projects over the entire lifecycle. Capital and operational expenditures of infrastructure projects are funded entirely with public finance. Public finance is also nowadays used to leverage private finance in case of infrastructure project funding. Governments used the public finance in the form of grants and provided as viability-gap funding to fund a limited portion of the funding required for infrastructure while the remaining portion comes in the form of private finance.