The government is looking to create an ecosystem where all financing instruments co-exist and meet the various needs of infrastructure projects. Providing long-term and cheap funding sources and reinvigorating public-private partnerships (PPPs) are on its agenda. In an interview with Indian Infrastructure, Baldeo Purushartha, joint secretary (infrastructure support and development), Department of Economic Affairs, Ministry of Finance, shares his views on the government’s initiatives and plans for infrastructure financing, the emerging needs of infrastructure and the role of other stakeholders. Excerpts…
What have been the key initiatives and achievements of the government during the past year?
The past few years have seen an unprecedented focus on infrastructure development, with concrete steps being taken to promote it. Over the past few budgets, the budgetary capital expenditure (capex) provision has increased by an average of 35 per cent on a year-on-year basis. Comparing the current budget to the budget for 2019-20, there has been an increase of almost 2.5 times. The capex provision under this year’s budget (2022-23) is around Rs 7.5 lakh crore. When extra budgetary resources (EBR) and revenue grants are factored in, this adds up to around Rs 15 lakh crore of government funds that will predominantly fund infrastructure projects.
The government is creating an enabling framework conducive to infrastructure development and post-developmental upkeep and maintenance. It has also launched the National Infrastructure Pipeline (NIP), the National Monetisation Pipeline (NMP), the PM Gati Shakti Master Plan, etc. NIP alone requires over $1.4 trillion in investment. This is where private capital needs to be crowded in. Through a variety of initiatives, the government is making the infrastructure sector considerably more attractive for private investment. The viability gap funding (VGF) scheme has been revamped to provide enhanced VGF support for PPPs across infrastructure sectors. The enhanced VGF can meet up to 60 per cent capex requirement in social sectors and up to 80 per cent capex requirement and 50 per cent opex for the first five years after the commercial operation date (COD) for pilot/demonstration projects in health and education. This is a significant aid provided by the government to encourage PPPs in these sectors, as well as those where infrastructure projects are economically desirable but commercially unviable. Recently, the government approved VGF for four PPP healthcare projects in Orissa and six PPP healthcare projects in Uttar Pradesh, which is a remarkable step.
“There is a need for a disciplined and focused strategy to ensure that a number of financing instruments are available for different phases and types of infrastructure projects.”
The India Infrastructure Project Development Fund (IIPDF) is another initiative that supports the transaction advisory costs incurred by project authorities, particularly smaller government entities. A PPP project’s complex nature necessitates the use of expert advisory services for its structuring. The government, through the IIPDF, supports up to 75 per cent of the cost of the transaction advisory. Often, hiring transaction advisers takes time. In order to address this issue, the government has empaneled 12 quality transaction advisers and prepared a manual for easing the process of procuring specialized advisory services for PPP projects.
Infrastructure is a long-term endeavor, which requires easy access to low-cost long-term capital. In the past few years, the Government of India has undertaken numerous initiatives for the same. For instance, the government has granted 100 per cent tax exemption to sovereign wealth funds investing in infrastructure sectors along with the required flexibility in infrastructure investment. In addition, the government is promoting municipal bonds to allow municipal corporations to raise capital without relying too much on government grants. Measures have also been taken to enable real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) to obtain funds at a cheaper cost. Previously, due to legal issues, lending to REITs and InvITs posed a significant challenge.
With regard to the NMP, the overall targets of the previous year were met, although a few ministries missed their targets by a slim margin. All ministries are expected to go beyond their targets this year due to improved performance. The establishment of the National Bank for Financing Infrastructure and Development (NaBFID) with a paid-up capital of Rs 1 lakh crore is another groundbreaking step by the government to boost infrastructure financing.
Which funding sources hold the maximum potential and which areas require a policy and regulatory push?
Infrastructure in India is primarily funded by banks and non-banking financial companies. Currently, a strong market for bonds does not exist and there is still a lot to be done to increase liquidity. Infrastructure debt funds (IDFs) have enormous potential, particularly if banks and IDFs collaborate to fund the whole life cycle of an infrastructure asset, where banks can lend at the construction phase of the project and IDFs can provide cheap and long-term capital once the project is de-risked after COD. Therefore, there is a need for a disciplined and focused strategy to ensure that a number of financing instruments are available for different phases and types of infrastructure projects.
A credit enhancement mechanism is required to deepen the bond market and improve the ratings of bond issuances. While India Infrastructure Finance Company Limited (IIFCL) and NaBFID have similar mandates, the government is also working on an alternative credit rating system that has been proposed by CRISIL and is best suited to the infrastructure sector. The Reserve Bank of India has also recommended commercial banks to use new expected loss-based credit rating system in conjunction with the existing one.
What are the challenges in infrastructure financing that require immediate attention? What measures are being taken to address these?
A poorly structured engineering, procurement, construction (EPC) or PPP project results in either cost/time overruns or project failure. Consequently, it is important to ensure rigorous project appraisal and develop a pipeline of bankable and viable infrastructure projects.
During the post-implementation phase, there is requirement of a strong dispute resolution mechanism, efficient post-award project management, and a well-defined renegotiation framework. The government is not only ensuring the availability of capital at a cheaper cost, but also handholding and supporting line ministries, PSUs, state governments and other entities in capacity building through various capacity building courses.
Information and knowledge sharing with states is equally important. Due to information asymmetry, states are sometimes oblivious of the centre’s initiatives. Thus, it is important to bring the centre and state governments together for infrastructure development.
What are your views on BOT, HAM and EPC as preferred modes of project implementation?
We are now working on implementing a waterfall mechanism to identify the most appropriate mode of project implementation, which varies across sectors. This is one of the deliverables we at the Infrastructure Finance Secretariat are working on.
The road sector is primarily driven by hybrid annuity model (HAM) projects. However, the Uttar Pradesh government has successfully bid out the Rs 27 thousand crore Ganga expressway project on a build, own, transfer (BOT) basis. Thus, the success of a project is contingent upon its execution strategy and structuring.
What are the top three priorities of the government for the next two years? What are the key opportunities?
Capacity building, infrastructure financing and a PPP push to attract private investments are the priorities for the government. To promote infrastructure development, an enabling platform is required where all stakeholders including the state governments and their entities and private stakeholders can participate.
There are huge opportunities available for foreign developers and investors. Foreign developers and investors can select their areas of investment based on their own preferences and inclinations. There are also opportunities to invest in projects that are deeply rooted in environmental, social and governance principles and have a green and environmental angle that can appeal to investors.
The one thing that was missing was the central hub in the Government of India, which works as the coordinating, developmental and supporting entity for line ministries and state governments in the field of infrastructure development. This was done by bringing an Infrastructure Finance Secretariat (IFS) in the DEA.
IFS will take up the issues of infrastructure development in coordination with the line ministries and state governments. These include policy formation, infrastructure financing reforms, appraisal and approval mechanisms, supporting programmes and schemes. It will also hand-hold PSAs in capacity creation. Thus, a wide spectrum of infra-development related activities and initiatives are being undertaken and the future of India’s infrastructure development looks quite promising.
What is the outlook for the infrastructure financing sector?
The NaBFID will be a game changer for infrastructure financing in India. In the foreseeable future, the government hopes to attract investors for PPP projects such as sewage, water supply, solid waste management and other social sectors to break its monopoly in these segments. It is true that we have an enormous investment requirement for infrastructure development in the country.
Infrastructure has a direct impact on the GDP of the country. It is also essential for the ease of living of citizens. However, given the huge funding requirement, this cannot be funded by public expenditure alone. We have to raise private capital for building the infrastructure of the country. This requires creating an efficient and robust framework for private investment in infrastructure including PPPs. We, at the Infrastructure Finance Secretariat in the DEA, are working on it in consultation with all stakeholders including private developers/investors.