An accent on infrastructure means exciting times for industry to be part of India´s growth story. A lot also depends on how well the sector innovates to maintain traction to attract the right investors.
India will need $1.5 trillion of investment in infrastructure over the next 10 years. Of this nearly $10 billion is required in sewage treatment plants. Similarly, about $8 billion is required to be invested in ensuring regular drinking water supply. All this money will be derived from both government and private financing. However, despite several proactive measures having been announced by the government since 2014, arranging finance for infrastructure projects remains a challenge.
What are the immediate reasons for this apparent lack of enthusiasm for investing in infrastructure development in one of the most promising markets in the world? Industry insiders largely attribute this to conventional lenders such as public sector banks shying away from investing in the sector.
According to Arun Lakhani, Chairman & Managing Director, of Nagpur-based Vishvaraj Infrastructure, ´The primary constraints are the basic nature of the contracts, because unless they provide adequate revenue security, banks or other financial institutions will be hesitant to support any such projects. Greenfield projects anyway have their own challenges if they are not adequately backed or the risk is not shared properly by the government.´
To elucidate his point Lakhani cites the example of the Hybrid Annuity Model (HAM) in roads and highways projects, where the government shares the risk with private developers. This has encouraged banks to fund these PPP contracts. ´If the contract is good, I don´t see any problem in terms of financing from financial institutions,´ he adds.
However, Vinayak Chatterjee, Chairman & Co-Founder, of the Gurgaon-headquartered Feedback Infra, prefers to be somewhat more critical in his assessment of the overall picture. ´One major constraint is the lack of enthusiasm on the Public-Private Partnership (PPP) model. Within PPP, there are the stressed balance sheets of banks and developer companies. Secondly, while there is no great scarcity of funds within the public sector, it is the capacity of public systems to implement (infrastructure) projects on time that remains a cause of concern. These I think are the two big constraints,´ he says.
The industry is largely supportive of expanding the bond market in India to give a push to infrastructure investment. In this regard, Prime Minister Narendra Modi´s reference to municipal bonds in his December 31 address has been welcomed by the industry.
Lakhani stresses, ´I think the bond market should be developed in India. In large infrastructure projects with longer gestation period and door-to-door tenor of the loans, bonds have proven themselves to be the best instruments worldwide.´
Other recommendations from the industry include reduction in public expenditure. Chatterjee, for instance, recommends a two-point strategy. ´One, should be the immediate revival of PPP and implementation of the recommendations of the Vijay Kelkar Committee Report. And on public expenditure, it is to shift a higher percentage of financing off the Consolidated Fund of India, off-the-budget into off-budget methods of financing, whether it is bonds, municipal bonds that Prime Minister Modi has spoken about, whether it is NIIF, or various other kinds of things. The proportion of the budget in public expenditure should come down over the years,´ he avers. However, for the moment, infrastructure firms will have to continue to rely on conventional institutions such as banks as their primary sources of funding.
Innovative Financing Tools
A few noteworthy steps have already been taken towards innovation. In 2014, the Securities and Exchange Board of India (SEBI) had notified regulations for real estate investment trusts (REITs) and infrastructure investment trusts (InVIts) towards establishment of an investment structure for the real estate and infrastructure sectors, respectively.
According to media reports, Blackstone, the world´s largest alternative investment firm, will likely raise over $700 million through two separate REIT listings for its Indian office assets with local partners. The development is expected to provide a much-needed impetus to the commercial real estate market. Similarly, notable infrastructure firms including IRB Infrastructure Developers, Sterlite Power Grid, Infrastructure Leasing & Financial Services (IL&FS), GMR Group and MEP Infrastructure Developers are looking to raise funding via InvITs. Anil Ambani-promoted Reliance Infrastructure is reported to be working on listing its entire 11 toll road assets under an InvIT.
Meanwhile, Indian infrastructure lenders have been keenly eyeing the masala bond market. Predicts Sanjeev Kaushik, Deputy Managing Director, India Infrastructure Finance Company Ltd (IIFCL), ´The masala bond will be a key instrument for targeting international investment.´
The Indian infrastructure sector is bound to receive a further fillip with a dedicated fund of Rs10,000 crore to provide credit enhancement for commercially viable projects. By elevating the credit rating of bonds issued by infrastructure firms, the fund will help them attract long-term investments especially from global insurance, pension and sovereign wealth funds. The dedicated fund, which will be in the form of a special purpose vehicle (SPV), will be classified an NBFC-infrastructure finance company.
The government has also set up the quasi-sovereign National Infrastructure Investment Fund (NIIF), with a corpus of around Rs 40,000 crore to meet the requirements of infrastructure finance through foreign investments. MoUs have already been inked with the Russian firm RUSNANO, Abu Dhabi Investment Authority and Qatar Investment Authority.
In one of the biggest and most ambitious transportation projects to be undertaken in India, the Japan International Cooperation Agency (JICA) is funding 80 per cent of the Mumbai-Ahmedabad bullet train project through a soft loan of Rs 79,000 crore at an interest rate of 0.1 per cent, with a tenure stretching over 50 years and a moratorium period of 15 years. This partnership in the high-speed rail corridor may well get replicated in other infrastructure segments involving major technology transfers with similar agencies from other countries.
Lakhani, whose firm has successfully rolled out the much-acclaimed ´Nagpur 24x7 Water Supply Scheme´ in partnership with the French firm Veolia, says initiating infrastructure creation involves more than just raising capital. ´I think it is not just about the ease of financing. It´s also about what you are offering to the lenders as they too want to ensure safety of their investment. Therefore, any project seen as safe and viable will find takers.´
Need for Competitiveness
Despite all the euphoria, infrastructure finance experts caution that with returns on Indian infrastructure projects having progressively declined over the past few years, the sector can no longer take foreign investments as a given. Informs IIFCL´s Kaushik, ´If the West is going to increase interest rates, while Indian rates are going to fall gradually, then that arbitrage opportunity reduces for global funds to come in and take on political and foreign exchange risks. The only option now for our projects to compete for that capital is to be globally competitive and efficient.´
In his victory speech delivered on November last year, US President-Elect Donald Trump had famously said,´We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We´re going to rebuild our infrastructure, which will become, by the way, second to none, and we will put millions of our people to work as we rebuild it.´
So, what could this imply for the Indian infrastructure sector? Explains Kaushik, ´In fact, PPP has caught real fire in North America, especially Canada and the US. The whole fiscal and economic stimulus programme that US presidents have been talking about entails rebuilding the infrastructure. My worry is that the global capital will be attracted to some of the opportunities in those developed countries.´
Given this backdrop, we are indeed in for some interesting times. Even as the world´s second most populous nation looks poised to make substantial additions to its infrastructure, it will need to keep innovating and re-inventing the market in order to remain an attractive proposition for potential investors.
- Manish Pant