Interview with Baldeo Purushartha

“NaBFID will be a game changer for infrastructure financing”

Baldeo Purushartha

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.

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