December 2019

There have been some green shoots of hope for infrastructure financing in the past year, despite the downbeat sentiment due to a decelerating economy. However, new problems have also surfaced.

On the plus side of the ledger, bank credit to infra sectors has increased, and bankers are now more rational in terms of due diligence. Stressed asset ratios have reduced. Financial closure has been achieved in many projects. The new instrument – the infrastructure investment trust (InvIT) – appears to be stabilising.

Optimism prevails in the private equity segment. PE investments hit a record Rs 700 billion in 2018-19 with 53 deals and the first eight months of 2019-20 have seen 36 deals with investments of around Rs 530 billion. Apart from renewables, power, roads and logistics, there have been deals in the aviation, telecom, and oil and gas sectors as well. Green bonds also continue to be quite popular.

On the disinvestment front, the government continued with its cross-holding agenda, asking PSUs to take stakes in other PSUs. But there are indications that it is seriously considering handing over management control in some businesses (Bharat Petroleum Corporation Limited, Concor, Shipping Corporation of India, Air India, etc.). This change in attitude is a positive development. The IPOs of several railway PSUs have received a mixed response, with IRCTC and Rites doing well. While disinvestment targets for 2018-19 were easily exceeded with the help of cross-holdings, it is likely the 2019-20 targets will be missed.

The crisis in the NBFC segment gives cause for serious concern. It started with the collapse of IL&FS but that caused some contagion. NBFC activity is down, and the liquidity freeze is affecting the macroeconomy. Revitalisation of this critical segment is vital, not only for infrastructure financing, but also for supporting consumption demand.

The hybrid annuity model has lost its sheen. There hasn’t been much movement in the bond markets. There haven’t been too many new IPOs either, apart from the rail PSUs mentioned above. The IBC has also failed to deliver as much as it had promised, but it does nevertheless, make a positive difference in timelines for resolution.

Banks have been able to compensate to some extent for the reduced NBFC activity. Multiple road projects (mostly hybrid annuity based) managed closures. The Navi Mumbai airport project also achieved closure, as did Phase II of Bengaluru airport. InvITs have raised over $4 billion so far but their performance in terms of returns has been less than stellar.

Massive investments in infrastructure will be required if India is going to get near that oft-

mentioned target of becoming a $5 trillion economy. This would require committed policy support and investments by the government, the private sector and by multilateral agencies. It is hard to envisage investments of the required order until such time as there is a rebound in growth.

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