As the country battles the COVID-19 pandemic, the government has released a roadmap for the infrastructure sector to provide the economy with a much-needed stimulus. Through this, it aims to improve project preparation and attract investments, both domestic and foreign, into infrastructure. On April 29, 2020, the Task Force on the National Infrastructure Pipeline (NIP) submitted its final report to the Ministry of Finance, projecting total infrastructure investments of Rs 111 trillion till 2024-25. An interim report of the task force, released in December 2019, had envisaged infrastructure investments of around Rs 102 trillion between 2019-20 and 2024-25.
During the 2020-25 period, about 71 per cent of the projected infrastructure investments in the country will be for the energy (24 per cent), roads (18 per cent), urban infrastructure (17 per cent) and railway (12 per cent) sectors. The centre and state at 39 per cent and 40 per cent, respectively, are expected to have an almost equal share in implementing the NIP, followed by the private sector at 21 per cent. Of the total investment of Rs 111 trillion, projects worth Rs 44 trillion (40 per cent) are under implementation, those worth Rs 34 trillion (30 per cent) are at the conceptualisation stage, and Rs 22 trillion (20 per cent) worth of projects are under development.
Task force recommendations
The latest task force report has called for a set of reforms and suggested ways of financing the NIP by deepening the corporate bond market, setting up development financial institutions (DFIs), accelerating monetisation of infrastructure assets and land, etc.
With infrastructure investment trusts (InvITs) emerging as an important source of financing, the task force has made suggestions for improving investor participation in these instruments. As per the task force’s recommendations, the Insurance Regulatory and Development Authority of India should revisit the prescribed cap of 5 per cent for insurance companies’ investment in a single InvIT. The authority should come out with clear guidelines allowing insurance companies to invest in debt securities issued by InvITs, in line with traditional companies. Similarly, the Pension Fund Regulatory and Development Authority mandates a minimum credit rating of AA for the sponsor of an InvIT in order to allow participation of pension funds. As InvITs are independent of their sponsors, the rating threshold should be made applicable only to InvITs and not the sponsors.
The task force suggests that there is a need to replicate the success of InvITs and the toll-operate-transfer model across other segments such as freight corridors, metro rail, oil pipelines, power transmission, ports and renewable energy to contain the large infrastructure deficit in the country.
Revitalising the bond market
A credit guarantee fund for infrastructure projects should be set up soon. This is expected to increase the appetite of bond market investors for investments in infrastructure projects. As most infrastructure projects are rated below AA, it is critical to enhance their rating to augment the access of institutional investors to the infrastructure sector through capital market instruments. Besides, timely resolution of cases referred under the Insolvency and Bankruptcy Code will further improve investor confidence and help deepen the bond markets for infrastructure funding.
So far eight urban local bodies (ULBs) in the country have raised Rs 33.9 billion via the municipal bond route. For other ULBs to raise funds through this route, key steps that are needed to be taken by local governments include improving financial discipline and making regular disclosures, augmenting the revenue base and buoyancy of revenues of local governments, bridging the gap in the creditworthiness of local governments through innovative credit enhancement structures, and encouraging pooled bond issuances.
Securitisation of infrastructure loan assets
Given the reluctance of institutional investors to bear the construction risk inherent in infrastructure projects, a securitised paper backed by the cash flows of operating infrastructure assets provides another avenue for patient capital. Most infrastructure loan assets typically bear a rating of not more than BBB- and with the absence of a market for lower-rated securitised paper, it is envisaged that these will require support to improve credit quality. Credit enhancements such as excess interest spread, cash collateral and guarantee can help improve the credit quality to meet investor expectations. Loan asset securitisation offers an opportunity to banks to alleviate larger risks from a single project and improve their capital ratios by transferring loan assets from their balance sheets to securitisation trusts and special purpose vehicles.
Setting up of DFIs
The NIP task force recommends suitable governance reforms in India Infrastructure Finance Company Limited (IIFCL). The possibility of regulatory reforms enabling IIFCL to be developed as a DFI needs to be examined by the government in consultation with the Reserve Bank of India. The task force also recommends a differential licensing system with an enabling regulatory framework to encourage the setting up of DFIs in the infrastructure sector, with domestic or foreign capital.
Boosting long-term investments
The government, in Union Budget 2020-21, has taken certain bold measures that are likely to improve global pension and sovereign wealth funds’ (SWFs) appetite for infrastructure investments. The elimination of the dividend distribution tax and 100 per cent tax exemption on interest, dividend and capital gains income with respect to investments made in infrastructure and other notified sectors before March 31, 2024 and a minimum lock-in period of three years are expected to bring about a significant change in the perception of SWFs and pension funds towards infrastructure investments in India and lead to greater inflows. The task force also recommends that measures be taken by ministries and regulators to simplify the procedural aspects of foreign direct investment in infrastructure by SWFs and pension funds, thus improving the ease of investing.
Encouraging green financing
The financing of green projects in segments such as renewable energy, clean transportation (including mass public transportation), sustainable water management and water recycling, waste-to-energy, and energy efficient buildings can be funded from the proceeds raised by issuing green debt securities. A greater number of public entities and private players must issue green bonds to raise finance which will be cheaper as global funds will be interested in investing in environment-related and socially responsible projects backed by a sound corporate governance framework.
The way forward
The task force has recommended that three panels/committees be set up: one panel for monitoring the NIP progress and eliminating delays; a steering committee in each infrastructure ministry for following up project implementation; and a steering committee in the Department of Economic Affairs in the Ministry of Finance for raising financial resources for the NIP. The government aims to raise the share of the private sector to 30 per cent in the coming years. This requires massive reforms in the way the public-private partnership model is designed, given the poor response of the private sector to such projects over the years.