The investment requirements for infrastructure development in India are huge. The 12th Five Year Plan had projected the total investments in infrastructure, for the period 2012-17, at Rs.55.7 trillion which was subsequently revised down to Rs.37.2 trillion during the appraisal of the plan.
Two-thirds of the infrastructure investment, as per the revised plan, was to be funded by the public sector (central and state governments) while the remaining one-third was to come from the private sector. The private sector's contribution to the infrastructure investment was revised sharply down to 34 per cent during the plan appraisal, compared to 48 per cent projected in the original plan.
Importance of private sector investment
Given the huge capital requirement for infrastructure development and fiscal constraints of the government, for faster infrastructure development, it is critical to have robust private investment. The private sector investment can further be bifurcated into equity investment and borrowings or debts undertaken by the private player for undertaking the project. Thus, for boosting private sector investment, it is equally important that there is adequate capital available with private players for equity investment, as well as access to long-term debt.
A majority of infrastructure projects undertaken by the private sector involves project financing, wherein external debt is availed for funding the project. This debt is to serviced from the cash flows generated from the project. As infrastructure projects have a long gestation period and asset life, and often generate lower cash flows during the initial years of operations, it becomes important that the debt undertaken for financing these projects also has a commensurate long maturity and amortisation profile.
Infrastructure credit in India
The key sources of debt for infrastructure sector are banks, non-banking financial companies (NBFCs), external commercial borrowings (ECB), mutual funds, pension funds, insurance funds, capital/corporate bond markets, etc. Since the infrastructure sector requires long-term funding, it is best suited to be financed by institutional investors with matching long-term liabilities as well as risk appetite. However, the infrastructure credit in India is largely from banks and NBFCs, accounting for over Rs 16 trillion.
In providing credit to infrastructure entities, among NBFCs, a major role is played by infrastructure finance companies (IFCs) which are dedicated to lending majorly to infrastructure sectors - a minimum of 75 per cent of total assets of IFCs should be deployed in infrastructure loans.
The other sources of debt funding include corporate bond market and ECB, infrastructure debt funds (IDF).
Apart from these sources, funding of some infrastructure projects is also from multilateral agencies like World Bank, International Finance Corporation, Asian Development Bank and Japan International Cooperation Agency.
Public sector banks have been the major sources of infrastructure project financing in India, where over half of the credit to the infrastructure sector is from banks and IFCs. The credit from banks has increased sharply from Rs 72 billion in FY2000 to Rs 9.3 trillion in FY2015. However, the outstanding bank credit to infrastructure has slowed down and declined in the last two years due to increasing non-performing assets (NPAs) and sector-specific constraints. As banks have liabilities in the form of deposits, which are of short to medium tenure, investment in infrastructure projects also results in asset-liability mismatch risks for them. While banks have been a major source of providing infrastructure credit in India, their capacity to continue to provide funds to meet the growing requirements of this sector is constrained. IFCs, with a dedicated infrastructure lending, generally have sizeable liability in the form of long-term funds raised from the bonds market, and hence are relatively more suited to match the long-term funding requirements of the infrastructure sector. Nevertheless, with significant NPAs, lenders are cautious about new exposures to the sector.
Therefore, alternative funding sources have to be developed and strengthened to meet the funding gap. This can come in the form of increased funding from pension and insurance funds, IDFs, infrastructure investment trusts (InvITs), ECBs and offshore rupee bonds through take-out financing and development of corporate bond markets.
Corporate bond market's role in infrastructure financing
The participation of corporate bond markets in financing infrastructure in India has been low; however, for debt-refinancing, bond markets have played a significant role in the last few years. The corporate bond market has shown promising signs as it has been growing at a robust rate with many operational projects being refinanced. While refinancing frees up a bank's exposure to infrastructure sector which can be used to finance new projects, banks lose a good asset for which they had taken risks during the implementation phase of the project.
While the corporate bond market has grown considerably over the years, the depth still remains low with limited investors. Further, the participation of bond market in project financing in India has been very low due to higher risk perception during the project implementation stage. This perception stems from the experience of implementation delays, cost overruns and issues faced in stabilisation in case of infrastructure projects. This, along with concentration on single asset cash flows, shorter debt tenure compared to overall economic life of the project and unpredictable ramp-up periods, constrains the credit rating of the project. Some of the prominent investors like pension and insurance funds, which have long-term funds matching the long tenure requirement of infrastructure sector, are constrained by regulations to invest in lower rated debt.
Constraints in infrastructure financing
As banks, which are the largest sources of credit to infrastructure, are grappling with high stressed assets, their exposure to the sector has witnessed a decline. Part of this has been taken over by corporate bonds market and other avenues like IDFs, InvITs, etc. However, financing of greenfield infrastructure projects continues to be majorly dependent on banks and, to an extent, on NBFCs. With limited avenues of long-term debt capital, the ability of private sectors to take up infrastructure projects is constrained. Similarly, a sizeable equity capital is required by private players to undertake infrastructure projects.
With many infrastructure projects undertaken in the past facing stress or being stranded, the equity capital available with the private developers has also been a constraint.
Key initiatives to improve infrastructure financing and the way forward
The government, along with RBI and SEBI, has taken multiple reform initiatives to improve funding availability for infrastructure sector. The key measures include take-out financing, credit enhancement scheme, relaxation of norms for ECBs and IDFs, flexible structuring of long-term infrastructure loans (also known as 5/25 scheme), masala bonds and InvITs. These initiatives are expected to gradually improve the funding scenario for infrastructure projects.
The credit enhancement scheme helps in improving the credit ratings of infrastructure projects so that long-term investors like pension and insurance funds can invest in it. While the credit enhancement scheme has not picked up as expected, it has the potential to significantly channel long-term debt capital into infrastructure sector. The government is also looking to launch a credit enhancement fund (National Infrastructure Credit Enhancement or NICE) to provide partial guarantee to the bonds by infrastructure entities. This fund will be promoted by India Infrastructure Finance Company Ltd (IIFCL), public sector banks and insurance companies.
IDFs, investment vehicles set up to refinance the existing debt of infrastructure companies, have also not picked up as expected. IDFs can be of two types: mutual funds (IDF-MF) regulated by SEBI or NBFC (IDF-NBFC) regulated by the RBI. So far, operations have commenced on (i) three IDF-NBFCs - IDFC Infrastructure Finance, India Infradebt and L&T Infra Debt Fund and (ii) three IDF-MFs - IIFCL, IL&FS and Srei. However, the credit books of IDFs have grown at a slower pace than anticipated. As per ICRA's estimates, the total credit outstanding, including investments in bonds, of IDF-NBFCs as on March 31, 2017 stood at Rs 112 billion, accounting for a mere 1.2 per cent of the total bank credit to infrastructure. Similarly, the growth of IDF-MFs has been even slower, with the average assets under management (AUM) of these entities in Q1 FY2018 being only around Rs 29 billion.
InvITs are expected to emerge as important vehicles for unlocking the capital of infrastructure developers deployed in operational assets. While an infrastructure company will be able to raise funds by way of sale of its stake in projects to InvITs, transfer of assets to InvITs will also result in lower consolidated borrowings for the company. There have been two InvIT listings thus far. IRB Infrastructure Developers became the first Indian infrastructure company to list its InvIT on the Indian stock exchange in May 2017. Later in May 2017, IndiGrid InvIT Fund, promoted by Sterlite Power Grid Ventures, also raised funds through InvIT. Many other players are in various stages of promoting and listing InvITs. However, the market response to the listed InvITs has been tepid.
As InvIT is more of a fixed income type instrument, the investor interest is expected to come primarily from long-term institutional investors.
These apart, the government has floated National Investment and Infrastructure Fund (NIIF) and plans to infuse up to Rs 200 billion annually into it. NIIF will also raise funds from long-term investors like sovereign funds and invest in infrastructure projects.
The measures taken so far have improved the infrastructure funding scenario; however, a lot more needs to be done given the huge infrastructure funding requirement. Traction in NIIF, InvITs, credit enhancement, etc. can help in bridging the gap to a major extent. The corporate bond market has shown promising signs with huge foreign portfolio investment (FPI) in the corporate bonds in the last one year. Recently, the FPI in corporate bonds has reached its maximum permissible limit of US$ 51 billion. With many FPIs waiting to invest in Indian corporate bonds, other routes like alternate investment funds, including IDFs, could gain some traction.
- Shubham Jain, Vice President and Sector Head, Corporate Ratings, ICRA Ltd