A Mixed Bag: Critical assessment of foreign funding in the infrastructure sector

Critical assessment of foreign funding in the infrastructure sector

Over the past couple of years, foreign funding in the form of multilateral aid, foreign direct investment (FDI), foreign portfolio investment (FPI) and external commercial borrowing (ECB) has become a critical source of infrastructure financing. The current year, however, showed a mixed trend with respect to financing from each of these sources. While many foreign investors pulled out money from the capital market, some relief was provided by a rise in multilateral funding and ECB issuances.

Indian Infrastructure gives a snapshot of the fund flow from these foreign sources…

Foreign direct investment

During the period 2013-14 to 2018-19 (till June 2018), FDI flows have been oscillating with no clear demarcation of an upward or downward trend. The oscillations were more marked in the past couple of years. In the period under consideration, a total of $34.95 billion of FDI inflow was witnessed in the infrastructure sector. In 2017-18, FDI recorded a substantial year-on-year growth of 26.98 per cent, peaking at $10.74 billion during the five-year period. In the first quarter of 2018-19, FDI inflow in the infrastructure sector was recorded at $3.21 billion, an increase of over 100 per cent over the corresponding period of the previous year. Most of the FDI in the first quarter of 2018-19 came into the telecom sector ($1.59 billion). This could be attributed to the acquisition of the telecom tower assets of Vodafone India and Idea Cellular by American Tower Corporation, a fund infusion by Vodafone, relaxation of FDI limits in telecom, etc.

     Foreign portfolio investment

FPI has been quite volatile between 2013-14 and 2018-19 (till October 2018). During the first seven months of 2018-19, FPIs withdrew a total of Rs 438.43 billion in equity and debt from the infrastructure sector. This is in conformity with the overall FPI sell-off that has been observed recently in the Indian capital market. Noted as the steepest outflow in a decade, the reason for the weakening investor sentiment could be rising global interest rates, high crude oil prices, trade disputes, volatile exchange rate of the rupee vis-á-vis the dollar, and widening current account deficit. This is in sharp contrast with the encouraging response that FPIs exhibited by investing Rs 548.24 billion in the infrastructure sector in 2017-18. In 2018-19 (till October 2018), the telecom sector saw the highest outflow of Rs 203.48 billion and Rs 4.2 billion in equity and debt respectively. Despite this dismal scenario, the ports and shipping sector attracted Rs 0.5 billion worth of FPI equity flows.

Multilateral funding

From 2013-14 to 2018-19 (till November 2018), the World Bank, the Asian Development Bank (ADB) and the Japan International Cooperation Agency (JICA) together extended $36 billion towards 123 infrastructure projects in the country. During this period, funding activity displayed a mixed trend with an alternating pattern. The year 2017-18 witnessed a decrease in financial assistance by 27 per cent over 2016-17. Financial assistance of $6.6 billion received for the year 2018-19 (till November 2018) has already crossed the amount received last year which stood at $5.09 billion. The highest amount of assistance was received by the urban transport sector with funding of $2.02 billion in 2018-19 (till November 2018). Urban transport was followed by railways and roads. During the current fiscal year, JICA provided 50.61 per cent of funding for the country’s infrastructure sector.

External commercial borrowings

ECBs displayed a pattern of alternating peaks and troughs from 2013-14 to 2018-19 (till September 2018). In the same time span, over $92.16 billion was raised through ECBs. During 2017-18, ECBs amounting to $16.5 billion were witnessed, a considerable increase of around 102 per cent compared to the $8.15 billion raised in the preceding year. In the first half of 2018-19, ECBs to the tune of $9.38 billion were raised as against $5.91 billion in the corresponding period of 2017-18. Sector-wise, oil and gas captured the highest share of the total ECB-sourced funds, followed by telecom and infrastructure finance. A notable trend has been the increasing ECB issuances by renewable energy firms. A total of 42 such issuances were witnessed, of which 17 were by Azure Power raising around $200 million.

The road ahead

Infrastructure financing cannot be left to the government and other domestic sources. It is crucial to attract external funds in order to supplement internal financial resources and bridge the financing gap. Foreign equity inflows hinge on a host of factors including interest rates in the domestic as well as international markets, policy reforms, the country’s macroeconomic performance and global investment climate. While some factors are beyond the control of the government, policymakers must ensure an environment conducive to foreign investment.