Budget 2021: Attracting long term financing is critical for infrastructure sector in India

By Kushal Kumar Singh - Partner, Corporate Finance, Financial Advisory

‘Infrastructure can deliver major benefits in promoting economic growth, poverty alleviation and environmental sustainability, but only when it provides services that respond to effective demand and does so efficiently.’ – (World Bank).

The above statement correctly summarizes the importance of infrastructure development for any economy, more so for a developing one. Infrastructure is the basic stepping-stone of a country and is directly responsible for its economic growth.

Taking cognizance of the same, Prime Minister Narendra Modi in his Independence Day 2019 speech, launched the National Infrastructure Pipeline (NIP) for FY 2019 to FY 2025 wherein an initial amount of Rs 100 lakh crore was targeted to be spent on the development of a group of social and economic infrastructure projects in the country. As per NIP, a total of about 7,400 projects have been included under the ambit of NIP within more than 30 sub-sectors out of which about 1,800 projects are already under development.

Successful completion of the NIP requires huge capital inflows. Infrastructure projects are generally capital intensive and have longer life spans. Typically, an Infrastructure project has a payback period of 15-30 years and hence necessitates long-term financing. However, the sources available for financing, let alone, long-term financing are finite and are not able to address the complete financing requirements. Further, sectoral limits on lending and limited availability of capital with the banks, who are the major lenders in this space, do not help the cause.

The government has taken steps to improve the availability of long-term financing such as:

Infrastructure Debt Funds (IDFs): Special vehicles for investment in infrastructure projects. IDFs extend long term financing to infrastructure projects developed through Public-Private Partnership and which have successfully completed one year of commercial operation. However, even after more than seven years of its launch, IDFs still have a long way to go to be termed as a popular financing structure.

Credit Enhancement Scheme: RBI has allowed banks to offer partial credit enhancements to corporate bonds issued by private entities for financing infrastructure projects. IIFCL, an institution set up by the government for funding Infrastructure projects also provides a partial credit guarantee to enhance the credit rating of bonds issued by infrastructure companies to AA or higher for the refinancing of existing loans.

Infrastructure Investment Trust (InvIT): Like mutual funds, InvITs is a collective investment scheme which enables direct investment of money from individual and institutional investors in infrastructure projects. Currently, there are 12 InvITs registered with SEBI.

Relaxation of ECB policy: ECB norms have been relaxed time and again to attract borrowing from foreign lenders.

However, there is still a lot left to be done. There is a need to come out with new mechanisms and improve on current provisions to encourage long term financing.
There is a need to develop a market for Long Term Infrastructure Bonds for the private sector which can only happen with participation from long-term private investors such as pension funds and insurance houses. Also, the current regulation that requires institutional investors to hold till maturity all securities should be eliminated, and they should be permitted to actively exchange in the market and private debt placement rules should be made less prohibitive.

The focus should be on gathering and scattering information on security issues, size, coupon, fundamental corporate execution and a central agency for overseeing this would be a step in the right direction. The government can also evaluate the creation of specialized financial institutions for all the large sectors in line with PFC/RFC. While in the past government has established IDFC and IIFCL to help the funding of infrastructure but now IDFC has converted itself into a bank and moved out from pure infrastructure financing thereby vacating the space to IIFCL which is also hamstrung because of its mandate of not leading a project appraisal and tagging along with a lead lender. The creation of sector-focused infrastructure financing institutions will be really helpful for the sectors looking for large outlays specially making funds available during the development phase of the infrastructure.

Channeling funds from the pension/provident funds through policy interventions such as allowing investment in bonds issued by infrastructure concessionaires during the construction period and/or creating an institution for credit enhancement thereby helping the infrastructure bond issuers in achieving the minimum credit rating for investment by pension/provident funds.

The creation of Bad Bank can go a long way in solving liquidity and NPA issues of the banking sector. At present, the Indian banking system has around 8.5 per cent of gross NPAs which may increase further due to the ongoing pandemic. Thus, a Bad Bank can aggregate all the stressed assets in the system and completely focus on resolution enabling the normal banking system to keep its focus on business.

With a focus on urban infrastructure development, there is a need to increase the representation of municipal bonds in the overall debt market. Proper structuring and incentives can go a long way in the development of the municipal bond market and thereby the availability of funding for the urban infrastructure projects.

While there has been a lot of discussion on impact bonds, they have not seen the light of the day in India. A policy regime to motivate investors to invest in impact bonds may be deliberated and adopted.

The above-mentioned measures may not completely solve the problem of long-term financing for the sector. However, combined with an increased focus on already existing mechanisms such as InvITs, IDFs, etc., implementing these new measures can help a long way in achieving the optimistic target set by the government. Especially after the Covid-19 pandemic, the government would need all the help it can get from the private sector for reviving the economy and hence private sector participation needs to be incentivised. There is a need to focus on aligning the tenor of financing opportunities available with the long gestation period of infrastructure projects and if the government is successful in achieving that, it is going to be a very exciting period for the Indian economy in the next four to five years.

Views expressed are personal to the author. The article was earlier published on The Indian Express on January 21, 2021

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