Infrastructure financing has received a fresh lease of life with the government’s National Infrastructure Pipeline (NIP) initiative and its asset monetisation drive. Taking cognisance of the importance of patient capital for infrastructure projects, the government has set a path for inviting long-term investments in the country. Privatising operational core assets is a means to attract private capital. In addition, the announcement of a new development finance institution (DFI) is a long-awaited move, heralding good news for the infrastructure sector. To underpin growth, the government has made infrastructure spending a priority.
As the country recovers from the second wave of the Covid-19 pandemic, the economy clocked a healthy growth rate of 8.4 per cent in the July-September quarter of 2021-22, primarily on the back of a low base but aided by increased vaccination and an uptick in consumption demand and agriculture. However, there are apprehensions about a durable recovery considering the rapid spread of the new Covid variant, Omicron.
Debt financing on the rise
Bank credit to infrastructure picked up in the past year owing to the improving perception of the sector. Gross bank credit grew at 3.6 per cent in 2020-21 to Rs 10.92 billion (as of March 2021) vis-à-vis negative growth in 2019-20. The road and power sectors witnessed an increase in credit from the banking industry. As of September 2021, bank lending to infrastructure stood at Rs 10.86 trillion. In addition, there were a number of financial closures during the past year. These include nine financial closures of road projects and one funding tie-up for Jewar airport. The gross non-performing asset (GNPA) ratio of banks from the infrastructure industry also came down, from 13.1 per cent in March 2020 to 10.5 per cent in March 2021 owing to decreased write-offs and lower slippages.
The bond market has been an underpenetrated route for fundraising in the past. It has been dominated by public issuances with corporate issues constituting around 27 per cent of the total bond issues. Of the corporate bond market, infrastructure issuances averaged around 25 per cent in the past four to five years. The year 2020-21 witnessed a surge in infrastructure bond issuances to Rs 2.9 trillion from Rs 1.4 trillion in 2019-20, as per data by ICRA. The increase was on account of large issuances from Reliance Jio. Green bonds are also picking up pace with India setting an ambitious renewable energy target of 450 GW by 2030. Domestic banks and lending institutions have been large issuers in the past; however, developers, including ReNew Power, NTPC Limited and Adani Green, are now incrementally approaching the green bond market directly.
Multilateral funding forms a crucial part of infrastructure financing for sectors such as urban infrastructure and urban transport. The Asian Development Bank, the World Bank and the Japan International Cooperation Agency have together extended around $8 billion worth of financial assistance to various infrastructure projects during 2021. The Asian Infrastructure Investment Bank is also assuming importance having lent over $1 billion to infrastructure projects in 2021.
Growth through equity investments
The capital market is buzzing with activity as a number of companies are hitting the market to raise funds. Overall, there were 60 initial public offerings (IPOs) during 2021 as against 18 in 2020, as per data from the National Stock Exchange. The availability of ample liquidity with investors, vaccination roll-out and faster economic recovery have prompted companies to float IPOs to fund their capex plans. During 2021, there were three IPOs in the infrastructure space – Indian Railway Finance Corporation, RailTel Corporation of India, and GR Infraprojects – which have raised a total of about Rs 64 billion.
The private equity market for infrastructure is well developed with huge interest in operational assets. In 2021 (till November), around Rs 386 billion was mopped up via asset sales, which is marginally higher than the Rs 384 billion raised during the entire 2020. Investors have also been piqued by infrastructure investment trusts (InvITs) and have been actively investing in these products. Two public sector InvITs – NHAI InvIT and Powergrid InvIT – together raised over Rs 125 billion during 2021 through private placement of units and public listing respectively. There are 13 InvITs in the country, the latest addition being Virescent Infrastructure InvIT, the country’s first renewable energy InvIT.
The infrastructure sector is poised to receive long-term funding as the government intends to attract foreign capital. The revival of the capex cycle of companies and the need to deleverage balance sheets will increase the need for debt financing. The creation of a DFI, with a capital base of Rs 200 billion, will supplement traditional bank lending to the sector and facilitate long-term funding to infrastructure projects. Disinvestment and public asset recycling have emerged as important alternative fundraising routes and will help plug the infrastructure financing gap.