Funding Uptick

Progress across most infrastructure financing avenues

The Indian economy has exhibited resilient growth and a steady performance in the past two years. GDP grew at 6.7 per cent in 2017-18, recovering from the jolt caused by demonetisation and the introduction of the goods and services tax. In the first quarter of 2018-19, growth jumped to 8.2 per cent driven by mining, manufacturing and consumer spending. The second quarter of the year witnessed a fall in GDP growth to 7.1 per cent; however, the country still remained ahead of China, retaining the tag of the world’s fastest growing major economy. Notwithstanding other risks looming in the form of volatility in oil prices and in the rupee and tightening global financial conditions, inflation still remains in a comfortable range of 4-4.5 per cent and provides the much-needed buffer against these headwinds.

Although there has been a substantial step up in investment in infrastructure, there will be an infrastructure investment gap of $526 billion by 2040, as per the Economic Survey 2017-18. Taking cognisance of this, the government, with the help of regulatory authorities, is encouraging tapping alternative funding sources to bridge the infrastructure investment gap at least partially.

Indian Infrastructure tracks the progress of various sources of infrastructure financing in the past year…

Debt financing improves

Commercial banks, which form the largest and the most critical source of funding for infrastructure projects, have shown reluctance in lending to the sector due to a pile-up of bad loans. As of September 2018, the banking sector’s exposure to the infrastructure space was around Rs 9.37 trillion, a slight increase over the Rs 8.91 trillion reported at the close of 2017-18. Considering the sector-wise exposure, the power and road sectors accounted for the maximum share of 75 per cent, as was the case in the previous fiscal year. The scenario improved a bit on account of a pick-up in bank credit to the power, road and telecom sectors.

During 2018-19 (till September 2018), external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs) worth $9.38 billion were tapped by infrastructure companies. The total amount raised during the period under consideration was 59 per cent higher than the previous year’s corresponding figure of $5.91 billion. During the entire 2017-18, fundraising through ECBs and FCCBs totalled $16.5 billion. Companies in the oil and gas and telecom sectors have tapped this route frequently. In the past 15-20 months, there has been a substantial increase in ECB issuances in the renewable energy sector. While ECBs are picking up pace, the volatile rupee (which was depreciating till recently), which is pushing the cost of hedging higher, can be seen as a dampener.

Lending by international agencies forms another important source of funds in the infrastrucutre sector. In 2018-19 (till November 2018), the World Bank committed over $1,000 million towards three projects, while the Asian Development Bank extended financial assistance to the tune of $2,199 million to 10 projects. The Japan International Cooperation Agency provided official development assistance of around $3,416 million (at current exchange rates) to seven projects. Overall, multilateral aid towards infrastructure has increased over the previous year.

Meanwhile, bond issues for the infrastructure sector are finally picking up. Over the past 15-18 months, a higher uptake for bonds was reflected by higher volumes. Most of this was witnessed in the form of private placements through private companies. Also, most of the bond issues were from the power and road sectors. Meanwhile, the country’s green bond market has seen a lot of activity. More recently, the State Bank of India raised $650 million via a green bond issue in September 2018. The proceeds will be used to fund environment-friendly projects. With regard to municipal bonds, of late, there has been some activity with issuances coming from Pune, Hyderabad and Indore. Between June 2017 and September 2018, five municipal bonds were issued raising a total of Rs 8.7 billion.

Scenario far better on the equity side

Private equity (PE) activity showed remarkable progress during the ongoing fiscal year. During 2018-19 (till November 2018), 28 PE deals worth Rs 475 billion have been witnessed, an improvement from the 21 deals worth Rs 172 billion during the corresponding period of the previous year. In fiscal year 2017-18, 34 deals worth around Rs 348 billion were recorded. Renewable energy and logistics attracted the maximum number of deals. However, total value of deals rose sharply with the Macquarie Group winning the first toll, operate and transfer (TOT) bundle (road sector) for Rs 96.81 billion in March 2018. During 2018-19 (till November), seven PE exits were witnessed. Of these, two exits each were in the renewable energy and logistics sectors, and one each in the water and sanitation, aviation and diversified sectors. During the corresponding period of 2017-18, six exits were reported in the infrastructure space.

With regard to the primary market, not many infrastructure companies decided to go public. There have been a total of seven initial public offerings (IPOs) raising funds of around Rs 14 billion in the ongoing fiscal year so far, as against 10 IPOs in the infrastructure space in the corresponding period of 2017-18, with a total fundraise of close to Rs 60 billion. The emergence of small and medium enterprises (SMEs) in the primary market is a notable trend. In the past 15-20 months, eight SMEs, mostly in the logistics sector, floated public issues. Meanwhile, the IPO market as a whole has remained buoyant with a flurry of activity. Industrial and consumer goods and services were the most active sectors. Strong domestic liquidity and good business models have boosted investor confidence. While the elections next year may throw up some uncertainty, investor confidence will nudge corporates to raise fresh equity from the market. The IPO pipeline is healthy with dozens of companies looking to go public in the next one-two years. Some of these are ReNew Power, GR Infraprojects, Rail Vikas Nigam Limited and Avana Logistek.

As far as equity inflow through foreign direct investment (FDI) is concerned, during the first quarter of 2018-19, infrastructure sectors attracted $3.21 billion through this route. Sectors such as telecom and power witnessed the highest fund flow. FDI inflow during fiscal year 2017-18 was $10.74 billion. The eased FDI norms in construction, aviation, railways, etc. have boosted investor confidence and the government’s Make in India initiative has further attracted foreign funds into the country.

Progress of alternative funding sources a mixed bag

After the lacklustre performance of the IPO of IRB’s infrastructure investment trust (InvIT) and Sterlite Power’s IndiGrid, companies shelved plans of floating an InvIT. There was, however, the first-ever private placement of an InvIT after regulations came into place roughly four years ago. In May 2018, the Canada Pension Plan Investment Board and Allianz Capital Partners acquired a 30 per cent and 25 per cent stake, respectively, in IndInfravit Trust, the InvIT floated by L&T Infrastructure Development Projects Limited, via private placement. The issue of misplaced expectations and a lack of understanding of the product has made its journey bumpy, despite multiple regulatory amendments.

The National Investment and Infrastructure Fund (NIIF) has made rapid strides in the past 18-20 months. The fund partnered with DP World to create a platform for investments in the ports, transportation and logistics sectors; partnered with HDFC in an investment platform for mid-income and affordable housing in the country; secured investments of up to $400 million from Temasek; and acquired IDFC Infrastructure Finance Limited from IDFC Limited, among other transactions. Meanwhile, the New Development Bank and the Asian Infrastructure Investment Bank (AIIB) have also extended credit to various infrastructure projects in the past 12-15 months. The AIIB also recently approved an equity investment of $100 million in the NIIF.

Pension and insurance funds continue to contribute far less than their potential. However, many foreign sovereign wealth funds, pension funds and PE players are placing bets on the country’s stressed assets, particularly in the power and roads space. Many cash-strapped promoters are putting their operational assets on the block to deleverage their balance sheets. As a crackdown on the rising non-performing

loans, the Insolvency and Bankruptcy Code [IBC], 2016 was implemented. On a stand-alone basis, of the 800 cases admitted to the National Company Law Tribunal, approximately 32 cases have been resolved and another 136 cases have gone for liquidation. Since the introduction of the IBC, a large number of corporate debtors rather than seeing revival have been pushed into liquidation. Although the IBC has made a strong political and economic statement in that it aims at finding a resolution, the country should not end up with too many liquidations.

In sum

India is moving towards becoming a $4 trillion-$5 trillion economy in the next decade from the current $2 trillion-plus. It continues to offer significant opportunities in the infrastructure space. Given the massive infrastructure financing needs, exploring alternative sources of funds and creating an enabling environment for them has become important. Steps such as securitisation of infrastructure loans and revitalising the partial credit guarantee scheme will be helpful in attracting the right kind of investors. Meanwhile, maintaining macroeconomic stability to keep the country on a high growth trajectory will improve the overall investment climate.

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