As the country continues to battle the Covid-19 crisis, the government has adopted a dynamic approach to bring the flagging economy back on track. Through its Atmanirbhar Bharat Abhiyan, the government aims to create a self-reliant economy and provide liquidity support to stressed sectors. Implementation of the National Infrastructure Pipeline (NIP) will further set the wheels of economic growth in motion through a multiplier effect. With constrained lending from traditional financiers, new and innovative funding routes are being actively looked at for financing the NIP.
Surge in the capital market
Calendar year 2020 has stood out for the initial public offering (IPO) market. As per data available with the stock exchanges, 12 IPOs during the year so far have raised around Rs 250 billion, significantly higher than the Rs 124 billion mopped up through 16 IPOs during entire 2019. High liquidity and buoyant investor sentiment, despite huge contraction in the economy, have helped companies raise this record amount. Of the 12 public floats, two were from infrastructure companies – Likhitha Infrastructure and Mazagon Dock Shipbuilders – both listing at a premium on the bourses. IPO activity from the infrastructure sector has been driven by the government’s intent to meet its disinvestment target. The offer for sale of public sector units such as Hindustan Aeronautics Limited and the Indian Railway Catering and Tourism Corporation also received a good response from non-retail investors. Seeing the euphoria in the capital markets, a slew of initial share sales are expected to hit the markets soon, including those of the RailTel Corporation of India and the Indian Railway Finance Corporation.
Emerging role of SWFs and pension funds
Sovereign wealth funds (SWFs) and pension funds have started to play a critical role in infrastructure financing. Their greater appetite for operational/completed projects has helped the country’s road, power, renewable and telecom sectors raise significant capital. India’s first quasi-SWF, the National Investment and Infrastructure Fund (NIIF) has also seen an uptick in activity (both in terms of funds raised and investments made) since 2018. The government, realising the importance of the fund in infrastructure financing, has approved a capital infusion of Rs 60 billion into the NIIF’s debt platform in the next two years. Multilateral banks, including the Asian Development Bank and the New Development Bank, as well as pension funds, including CPP Investments and Ontario Teachers, have also made commitments to the NIIF over the past 12-15 months. The NIIF has been on the lookout for infrastructure investment opportunities. In the past few months, it has collaborated with NTPC Limited to build sustainable energy infrastructure in the country and, most recently, has invested in Ayana Renewable Power. It is also keen to participate in the railway privatisation process. Further, the NIIF is taking steps to shore up capital from global investors.
Exploring new avenues
The country needs alternative funding mechanisms for infrastructure creation. Infrastructure investment trusts (InvITs) hold potential for monetising assets and freeing up locked capital. With enabling guidelines in place, the instrument is attracting both developers and investors. In the future, the country is expected to see more InvITs in the road, renewable energy and telecom sectors. SWFs and pension funds are also placing bets on the instrument attracted by returns in the early to mid-teens. While a few taxation-related issues still need to be addressed, overall, InvITs are proving to be a noteworthy financing vehicle for brownfield assets.
The government recognises the fact that it has “no business to be in business” and is thus encouraging private investments, which have been subdued in the infrastructure space over the past few years. Through innovative models such as hybrid annuity and toll-operate-transfer, it is revitalising private sector interest. Privatisation of airports and railway stations is a step in this direction. Meanwhile, strategic sales and land monetisation are also enabling the government to raise capital. While the Covid-19 pandemic has slowed the strategic sale process of various companies, the government will continue on the public asset recycling and disinvestment path.
The government is actively looking to set up a development finance institution (DFI) to provide long-term funding to infrastructure projects. It has proposed to give India Infrastructure Finance Company Limited (IIFCL) the DFI tag. Besides, it is exploring securitisation of infrastructure loan assets to create a market for lower-rated securitised paper. Credit enhancements can help improve the credit quality of and usher capital market investors into this asset class. Credit enhancement will also play a vital role in enabling investments in project bonds and municipal bonds. While there has been some action in the corporate bond market in the ongoing year, mostly large corporates were able to raise capital to keep liquidity buffers to weather the pandemic-induced shock. Thus, there is a need to relax the investment mandates of insurance and pension funds to channelise patient capital into credit-enhanced debt instruments of smaller infrastructure companies. Net, net, a mix of innovative financing is a must to meet the humongous funding requirements of the NIP.