Slow Take Off

Emerging funding sources continue to face challenges

The infrastructure sector in India is at a critical juncture today. Faced with mounting challenges of arranging funds for project development, there is a risk of project development being affected in case of financing failures. Challenges such as the high cost of capital, obstacles in obtaining non-recourse funding and dearth of long-term funding sources are currently haunting the industry. Moreover, the banking sector is under a lot of stress on account of the high level of non-performing assets (NPAs). Thus, the time is ripe for the country to tap alternative sources of funding such as infrastructure investment trusts (InvITs), infrastructure debt funds (IDFs) and the National Investment and Infrastructure Fund (NIIF) to finance infrastructure projects.

Infrastructure investment trusts

Proposed in 2013-14, InvITs provide a platform to developers for monetising their assets and freeing up capital. InvITs’ units can either be publicly traded via initial public offerings or be privately placed. In May 2017, the IRB InvIT Fund, sponsored by road developer IRB Infrastructure Developers Limited, became the first InvIT to be listed on the stock exchange and was oversubscribed 8.57 times, raising over

Rs 50 billion. In the power sector, the India Grid Trust, sponsored by Sterlite Power Grid Ventures Limited, raised Rs 22.5 billion from the primary market. The issue witnessed a lukewarm response from various investor classes and was oversubscribed 1.35 times. However, both the trusts debuted at a discount on the bourses reflecting investor diffidence towards the instrument. L&T Infrastructure Development Projects Limited also floated its InvIT in May 2018 through private placement. The InvIT saw interest from the Canada Pension Plan Investment Board and Allianz Capital Partners that took 30 per cent and 25 per cent of the InvIT units respectively. Meanwhile, Cube Highways and Infrastructure Private Limited and ACME Solar are exploring the possibility of setting up an InvIT. Brookfield is also sponsoring an InvIT, India Infrastructure Trust, for which it is awaiting the Securities and Exchange Board of India’s (SEBI) nod.

Various regulatory amendments governing InvITs have also been made recently with the objective of making the product more attractive. For instance, SEBI allowed strategic investors such as multilateral financial institutions and non-banking financial companies (NBFCs) to invest up to 25 per cent of the total offer size in such trusts. In addition, listed InvITs can now allot units to a minimum of two investors and a maximum of 1,000 in a financial year. Moreover, the Reserve Bank of India (RBI) permitted banks to invest up to 10 per cent of the unit capital of InvITs and SEBI accorded approval to mutual funds for investing in these trusts.

Overall, InvITs suffer from a perception problem. Equity investors are looking to earn a higher return than what the debt-like InvIT product can deliver, and therein lies the problem. Better understanding and lowering of return expectations can change the outlook for the product.

Infrastructure debt funds

IDFs were announced during Union Budget 2011-12. These are investment vehicles which can be sponsored by commercial banks and NBFCs in which domestic/offshore institutional investors, especially insurance and pension funds, can invest through units and bonds issued by IDFs. Despite the ability of IDFs to re-finance non-tripartite agreement-backed projects and a wider gamut of projects able to tap the route, not much activity has been witnessed in the space.

As of September 2018, there are four active IDF-NBFCs with outstanding loans/investments of around Rs 200 billion in operational infrastructure projects. These are L&T IDF, Infrastructure Development Finance Company (IDFC) IDF, ICICI Bank-backed India Infradebt and Kotak IDF. In addition, there are two IDF-MFs (mutual funds), launched by Infrastructure Leasing & Financial Services Limited and India Infrastructure Finance Company Limited, which are currently operational. One of the key advantages of the IDF-NBFC is that it has helped draw investors by allowing investments only in infrastructure projects that have successfully completed one year of commercial production. Hence, they do not involve any construction risks. However, these funds are still minuscule in the larger context of banks’ lending exposure to the infrastructure sector.

There have also been a number of challenges that IDFs have faced in the Indian scenario due to which their growth has been slower than anticipated. First, IDFs, with smaller balance sheets, face limitations in providing total refinancing solutions. They have to participate in consortiums with other banks/lenders. Second, there is increasing competition in the refinancing market. Due to low credit growth, banks are retaining good operational projects at fine margins. Also, better credit rated borrowers prefer to tap the bond market for meeting their funding needs.

National Investment and Infrastructure Fund

Based on the concept of a sovereign wealth fund, the NIIF was registered in December 2015 and became active in the second half of 2017. It is structured as a Category II alternative investment fund and is registered with SEBI. After its registration, it was able to raise funds from global institutional investors such as Abu Dhabi Investment Authority and Temasek Holdings. The NIIF is targeting a corpus of Rs 400 billion, of which the government will contribute 49 per cent and the rest will be raised from foreign and domestic strategic investors.

The NIIF currently has over $3 billion of total committed capital across three funds. These are the Master Fund, Fund of Funds (FoF) and Strategic Fund. It has shown significant activity during 2018. First, in January 2018, it announced the creation of its first investment platform, Hindustan Infralog Private Limited (HIPL), in partnership with Dubai-based port operator DP World Private Limited. This platform will invest up to $3 billion in ports, terminals, and transportation and logistics businesses in the country. Next, in February 2018, the NIIF started activity in its FoF by launching the Green Growth Equity Fund (GGEF). The NIIF and the UK government together committed £120 million each for the fund, which will be managed by EverSource Capital. The GGEF aims to raise £500 million from global institutional investors to invest in areas such as renewable energy, clean transportation, water, sanitation, waste management, and emerging technologies in India which offer significant investment opportunities and potential for attractive returns. Besides this, the Asian Infrastructure Investment Bank (AIIB) also approved an equity investment of $100 million in June 2018, in the NIIF’s FoF. AIIB is considering a further investment of $100 million as Phase II. This would take the bank’s total commitment to $200 million. Subsequently, in March 2018, HIPL acquired a 90 per cent stake in Continental Warehousing Corporation (Nhava Seva) Limited.

This was followed by the NIIF securing the second closure of its Master Fund in September 2018. This time, Temasek Holdings committed to investing up to $400 million in the fund. This could include the potential co-investments with government-anchored funds. In October 2018, NIIF acquired a majority stake in IDFC Infrastructure Finance Limited (IDFC-IFL) NBFC. IDFC-IFL manages a debt fund and has a loan book of Rs 45 billion. This acquisition will enable the NIIF to provide private debt funding to infrastructure projects. It also demonstrates its ability to make commercially attractive countercyclical investments.

Conclusion

Significant developments have taken place with respect to alternative sources of infrastructure financing. Though most of them started out with a lot of enthusiasm, they are yet to make the intended impact. This is primarily attributed to factors such as a lack of enthusiasm among domestic investors to invest in them as well as a lack of awareness about their future prospects. Nevertheless, considering the current situation of mounting NPAs with Indian banks, it becomes imperative for these funds to be more effective. What is required is a relook at them and structuring them in such a way so as to attract more funding.

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