Opportunities Open Up: Mix of funding instruments available for infrastructure financing

Mix of funding instruments available for infrastructure financing

Over the past year, the infrastructure financing landscape has improved due to greater liquidity with the banks, the expanding role of global funds and the offtake of new investment vehicles such as infrastructure investment trusts (InvITs). The government too has taken initiatives to ramp up private investment in the infrastructure space, with the National Infrastructure Pipeline (NIP) and National Monetisation Pipeline (NMP). Meanwhile, new sectors such as green hydrogen and e-mobility are attracting increasing interest. Indian Infrastructure presents the views of leading experts on the current state of infrastructure financing, key government initiatives, and the future outlook and opportunities for investors…

What has been the progress in the infrastructure financing sector over the past one year?

Sujoy Bose Managing Director and CEO, National Investment & Infrastructure Fund Limited

Sujoy Bose

Notwithstanding the disruption caused by the Covid-19 pandemic, the infrastructure financing landscape has evolved considerably in the recent past. The infrastructure sector continued to grow despite the pandemic, with large-scale investments in roads and renewables. Highway construction by the National High­wa­ys Authority of India (NHAI) grew to 28 km per day in 2021-22 from 12 km per day in 2014-15. Si­milarly, In­dia has added over 19 GW of renewable energy ca­pacity in the last two yea­rs, during the pandemic. India has been learning from its experience in public-private partnerships (PPPs) and expanding it to new sectors. For instance, under the National Mis­sion for Clean Ganga, a sewage treatment ca­pa­city of close to 640 mld is now operational under a hybrid annuity model – a transaction structure originally envisaged and implemented in the road sector.

Domestic banks, the primary debt provide­rs for the infrastructure sector, are flush with liquidity and have seen a growth of 9.3 per cent in their infrastructure books, to reach Rs 12.02 trillion. Infrastructure lending has been growing at a higher pace compared to corporate books for domestic banks, which indicates the confi­de­nce of lenders in the sector. Global capital flow to Indian infrastructure continues to grow, with the sector witnessing a record $7.8 billion of foreign direct investment during 2020-21. Global funds have also been active investors in InvITs. CPP Investments and Ontario Teachers’ Pension Plan have been major investors in the InvITs of government entities such as Power Grid Corporation of India Limited (Powergrid) and NHAI. Overall, we see that the sector has been able to attract high quality equity and do­mestic debt even during the pandemic.

“The infrastructure financing landscape in India has evolved considerably in the recent past.” Sujoy Bose

K. Ravichandran Executive Vice-President and Deputy Chief Rating Officer, ICRA Limited

K. Ravichandran

Over the past one year, both the central and state governments have stepped up their budgetary capital outlay for the infrastructure sector. Further, credits to the infrastructure sector have improved over the years, with outstanding credit to infrastructure from banks and NBFCs registering a compound annual growth rate (CAGR) of 7.7 per cent in the last six years (till March 2022). Over this period, however, the share of banks has decreased, with the non-banking financial companies (NBFCs) growing at a much higher pace (CAGR of 13.7 per cent).

Banks have been favourably looking at fin­ancing road projects based on the hybrid an­nui­ty model, renewable energy projects and InvITs. Nevertheless, private sector participati­on remains moderate, and there are limited av­e­nues for long-term credit to infrastructure pro­jects. To augment the long-term financing ave­nues for the infrastructure sector, a new development financial institution (DFI) – the National Bank for Financing Infrastructure and Develop­ment (NaBFID) – has been set up as an all-India financial institution, regulated and supervised by the Reserve Bank of India. The government has infused a capital of Rs 200 billion in NaBFID, which is expected to start lending to infrastructure projects towards the end of the current financial year.

“Reigniting private sector participation in the infrastructure space can help bridge the financing gap and
achieve the NIP targets.” K. Ravichandran

Project Advisory & Structured Finance (PASF) Team SBI Capital Markets

PASF Team, SBI Capital Markets

With the InvIT model gaining traction, the road sector has witnessed increased interest from institutional investors, deepening financing av­enues for road projects, and increased refinan­cing activity. Despite Covid-19’s impact, financing for the airport sector with respect to greenfield and brownfield projects has been positive. Moreover, domestic players in the port sector as well as the metro sector are predo­minantly dependent on bank financing, under the public-private partnership model. The introduction of various reforms and initiatives by the government, coupled with 5G dep­loy­ment, will boost financing in the telecom sector. Go­ing forward, fresh investments in the power se­c­tor are mainly expected in the renewable en­er­gy and transmission segments.



“With the InvIT model gaining traction, the road sector has witnessed increased interest from institutional investors, deepening financing avenues for road projects, and increased refinancing activity.” PASF Team

What has been the impact of the key initiatives taken by the government and regulators?

Sujoy Bose

The last two years saw three very important developments that set in motion a paradigm shift in India’s infrastructure financing ecosystem. First, we saw the National Investment Pi­pe­­line, which opened up several new sectors for private investment. Second, one of the wor­ld’s largest asset monetisation program­mes, the National Monetisation Pipeline, kicked off. Third, the government unveiled the Gati Shakti Master Plan, a transformative approach for ec­o­nomic growth that aims to provide integrated and multimodal connectivity infrastructure to various economic zones.

New investment opportunities have been created — for instance, India successfully conc­l­u­ded the world’s largest e-bus deployment tender on a PPP basis for about 5,500 buses, acro­ss nine cities, at a total investment of over $1 billion.

India has now created a bouquet of investment vehicles suited for investors with varying levels of risk appetite – from retail investors to in­frastructure funds. Today, India offers opportunities ranging from listed InvITs, which are well suited for retail investors, pension funds and other passive yield seeking investors, to build-operate-transfer models, suited for more active investors, such as infrastructure fund ma­nagers and developers.

The government has also introduced regulations for ease of investing by global pension and sovereign funds. Reduction in several dir­ect taxes to fully exempt global sovereign wealth funds and pension funds from taxes on infrastructure investments have helped market participants raise sizeable capital. The timebound insolvency resolution framework, ushered in by the Indian Bankruptcy Code, has increased lending institutions’ ability to provide risk capital at attractive rates to the sector. Single-window clearance for foreign investors and the av­ailability of a dedicated special point of contact for large investors have together made it much easier for global investors to engage with important stakeholders in the country.

The impact of these initiatives has been two-fold. First, the presence of large global ins­ti­tutions in India has increased considerably. The previous year saw several foreign pension funds set up new dedicated offices in India, wh­ile several professional investment mana­gers expanded their presence in India considerably. An internal analysis of recent asset allocation trends by global pension funds indicates that the share of Indian infrastructure in global pension funds’ assets under management has continued to increase over the last few years (by about 2 percentage points between2018 and 2021 alone). Second, several domestic de­velopers and large foreign investors started incubating partnerships to deepen their relationships and invest in sizeable opportunities in the infrastructure sector.

K. Ravichandran

The government has taken various steps to increase private sector participation in infrastructure development by reducing the bottlenecks in project implementation and providing a conducive environment for infrastructure in­vestments in the country. This has also supported foreign capital investment in the Indian infrastructure sector. Over the last two decades (Ap­ril 2000 to March 2022), the construction-infrastructure sector has seen $28 billion of foreign direct investment equity inflows, of which $13 billion has come during the last three years (fi­nancial years 2020-2022). Foreign pension funds, insurance companies, private equity pla­y­­ers and global investment firms have invested in the Indian infrastructure space.

The NIP has identified infrastructure projects involving investments to the tune of Rs 111 trillion for 2020-2025. The NIP was laun­ched with 6,835 projects and has been expan­ded to over 9,300 projects, covering 34 infra­str­ucture sub-sectors. Further, a new integrated approach has been formulated under the PM Gati Shakti national master plan for infrastructure development with respect to holistic multimodal connectivity. The Gati Shakti initiative aims to bring in comprehensive planning and cross-sectoral integration to enhance efficiency. These initiatives have started yielding results with the increasing pace of infrastructure investments in the country.

PASF Team, SBI Capital Markets

In the road sector, the changes made in model concession agreements have addressed certain concerns of industry participants pertaining to early monetisation opportunities, and he­lp­ed im­­pro­ve the liquidity position during the Covid-19 phase. Private participants have embraced key government measures for ports, as reflected in the higher-than-anticipated royalties quoted in the most recent biddings. Ini­tiatives such as the promotion of re­gio­nal routes and steps to ex­pand airports in Tier II and Tier III cities, under the Airports Au­tho­rity of India (AAI), have also con­tributed to faster recovery of passenger traffic. Indirect support provided by the Government of India such as ECLGS can be considered effective, as no airline shut shop in India during the pandemic. The production-linked incentive sche­me and the auction of 5G spectrum in the telecom sector will help reduce the huge burden on the liquidity profile of the telcos, free up reso­urces for investing in requisite capex, and accelerate growth. The cost of rolling stock has decreased from Rs 120 million to Rs 80 million as a result of a government mandate for in­digenisation of rolling stock and a minimum local content limit for sub-systems.

What has been the experience with asset monetisation thus far?

Sujoy Bose

The asset monetisation experience in India has begun in right earnest. Our internal studies in­di­cate that the Powergrid and NHAI InvIT programmes, for instance, have been a resounding success and are reflected, for instance, in both the performance of the assets, and the overall returns generated by the investors (ab­out 20 per cent for the Powergrid InvIT and in the mid-teens for the NHAI InvIT). The toll-op­erate-transfer opportunities in the road sector have also seen substantial investor interest. While, in 2021-22, significant progress on coal and mineral asset monetisation enabled the go­vernment to surpass its first-year target un­der the NMP, progress in other sectors lagg­ed behind the government’s initial targets.

K. Ravichandran

There has been healthy progress in infrastructure asset monetisation, particularly in the road and power sectors. As per the NMP, asset monetisation worth Rs 6 trillion is planned for financial years 2022-2025, with the key sectors being roads, ports, airports, railways, wa­rehousing, gas and product pipelines, power generation and transmission, mining, telecom, stadiums, and urban real estate. Against the plan­ned monetisation of Rs 0.88 billion for financial year 2022, the actual asset monetisation was higher at Rs 0.97 trillion. The key monetisation transactions included TOT-based PPP concessions on national highways, the InvIT of Powergrid and NHAI, annual accruals from mineral and coal blocks auctioned, re­cei­pts from six airports leased on PPP mode and private investment from port terminals bid out in PPP mode.

As per the NMP phasing, the monetisation target for financial year 2023 is Rs 1624.22 billion. This is expected to be primarily met th­ro­ugh TOT bundles, future InvIT issuances, PPPs in airports and ports, silos and warehouses, and monetisation of operational power generation and transmission assets, tower assets, and mining assets. Given the steeper target, and in­c­reased uncertainty on the macro-environment with global geo-political issues, and global inflationary pressure, achieving the target for financial year 2022 will be challenging. How­ever, gi­ven the importance of NMP in financing the NIP (the asset recycling and monetisation mechanism is expected to support 5-6 per cent of the aggregate capex under the NIP), it is expected that the government will take measures and fast-track the asset monetisation plans to ac­hieve the target over the medium term.

PASF Team, SBI Capital Markets

The InvIT model has seen reasonable success in the road sector with respect to asset monetisation over the past few years, not just for de­velopers but also for the National Highways Au­thority of India. The toll-operate-transfer model has witnessed increased competition, with re­ductions in the concession period and project size. The government is in the process of bund­ling airport assets together to fetch attractive bids for the privatisation of 25 existing AAI airports. Furthermore, the divestment of Air India was successfully completed on January 27, 2022. A few port sector monetisation deals ha­ve been made, including privatisation of the Jawahar Lal Nehru Container Terminal and sta­ke sale in Gangavaram Port to the Adani Group by the Andhra Pradesh government. Three sta­te-run power companies – NTPC Limi­ted, NHPC Limited and Powergrid – have firmed up a mix of models to realise the maximum value fr­om their hydropower and renewable en­ergy as­sets, as part of the National Monetisa­tion Pipe­line. The Rs 70 billion Powergrid InvIT is a key monetisation milestone. Meanwhile, BSNL has initiated the sale of its 10,000 telecom towers in order to raise Rs 40 billion. Pipe­line asset mo­netisation is also being explored by oil marketing companies.

What are the key challenges that remain unaddressed?

Sujoy Bose

While concerted efforts by various government entities have solved several challenges faced by investors, there are a few areas that the government is currently working on. Resolution of the­se issues can provide a further fillip to investments in the infrastructure sector in the country.

First, dispute resolution and contract enfor­cement frameworks are being strengthened. Wh­i­le disputes and commercial disagreements between consortium partners/investors and go­v­ernment entities will always exist, the timebo­u­nd resolution of these disputes can considerably reduce the friction that may at times occur as an unintended by-product of such disputes.

Second, the adoption of best practices in infrastructure at a sub-sovereign level needs to catch up with the national level, and is being ac­tively improved. There is a need to put in pla­ce me­chanisms to ensure the propagation of these best practices across various levels of the government, and to also put in place appropriate institutional structures to help the private sector manage risks inherent in transacting with counterparties at various levels of the governance system in India. For instance, credit tra­ck record – especially at the urban local bo­dy level – needs to be improved, especially to fa­cili­tate private sector participation in local government-level projects. This calls for the cr­ea­tion of an institution like Solar Energy Cor­po­ration of India for municipal/urban infrastructure projects (in sectors such as healthcare, wa­ter, and waste management).

Third, there is a need for long-term fixed rate debt financing and domestic capital. The cr­eation of the National Bank for Financ­ing In­fra­structure and Development and propo­sa­ls from the Employees’ Provident Fund Orga­nisa­tion/ domestic insurance companies to in­vest in dom­estic infrastructure would help in add­ressing this issue. The government is committed to encoura­ging and finding ways to catalyse the flow of domestic capital into infrastructure projects.

K. Ravichandran

Reviving private sector participation and widening infrastructure financing avenues are two key challenges that need further improvement. While infrastructure investments have been showing an increasing trend, private sector participation is still not widespread and is present in only selective pockets. About 21 per cent of the NIP projects are to be implemented by the private sector and are expected to be funded through a mix of equity, debt and grants with equity contribution from private players, public sector undertakings, etc., estimated to fund 3-7 per cent of the total infrastructure investments under the NIP. Hence, for an efficient and sustainable pace of infrastructure development, reviving private sector investments is crucial. To this end, stable regulatio­ns/policies and equitable sharing of risks will help in attracting private sector investme­nts in infrastructure. In addition, despite mea­sures ta­ken earlier, sizeable claims/disputes still re­main unresolved. Further, with the inc­rease in infrastructure investments, the ave­nu­es for credit to the sector also need to be scal­ed up. To this end, a ramp-up in lending by NaBFID can help in bridging the gap to an extent. Besi­des, attracting long-term capital in­flow into the sector is also crucial as it will help in churning of developers’ capital, which will enable developers to take up new projects.

PASF Team, SBI Capital Markets

For toll-based road projects, concerns regarding long-term traffic visibility need to be add­re­ss­ed, considering the competing upcoming ex­pressways. A key challenge for airports would be to sustain interest amongst various bidders, domestic and international, in partici­pa­tion in the future privatisation process. In­tense competition and reduction in real yields for airline companies due to commercial liberalisation po­ses a hurdle. Regulatory interventions for ports may be required to promote traffic, with a key risk-sharing mechanism. Adverse moveme­nt in imported coal prices has limited the operations of imported coal-based plants in the power sector. The telecom sector has be­en pla­g­ued by low average revenues per user (ARPUs), straining the financial health of telcos. As petroleum products are not under the go­ods and services tax regime, this results in non-uniform taxation. The high costs asso­ci­a­­­­ted with electric vehicles and last-mile connectivity in metros are further challenges.

What is the outlook for infrastructure financing for the next one to two years?

Sujoy Bose

The Indian infrastructure sector is likely to see three important trends emerging in the next three years – first, a sustained increase in the presence of global and domestic institutional in­­vestors at the project level – including as asset owners, with domestic developers as im­plementing partners. This will enable developers to focus on managing execution risk wh­ile institutional investors continue to underwrite financial risks in projects. This clear de­ma­r­ca­tion in risk underwriting will facilitate efficient capital pricing and fast-track project de­velop­ment across the country.

Second, new sectors such as offshore wi­nd, green hydrogen and energy storage are li­ke­ly to come up as investment opportunities alongside conventional sectors such as roads and renewables. This could necessitate the development of new project structures and policy frameworks that can facilitate the flow of long-term commercial capital in these sectors. A similar trend could also emerge in other sectors that have otherwise been elusive to private investment in the past.

Third, state government-sponsored infrastructure assets such as the Mumbai-Nagpur Ex­­pressway and multiple expressways in Uttar Pradesh, which have been implemented by sta­te entities, could see some form of asset monetisation, increasing the pool of investment opportunities for investors.

Supported by an appropriate policy framework and economic environment, these trends, together, have continued to provide a major fillip to the Indian infrastructure sector and pave the way for increased institutional capital flows into this sector through the next several years.

K. Ravichandran

As per estimates, there is a financing gap of 15-17 per cent in the NIP, which has to be met th­rough measures such as the new DFI (NaBFID), and asset recycling and monetisation. NaBFID can provide 2-3 per cent of the financing re­quirement of the NIP while the NMP can bridge another 5-6 per cent of the gap. Hence, a ramp-up in these two will be crucial to meet the NIP funding requirement. With the ex­pected operationalisation of the NaBFID, credit availability to the infrastructure sector is expected to improve in the next couple of yea­rs. Never­theless, there will be a shortfall of 8-10 per cent for the NIP. To counter this, the Na­tio­n­al In­vest­ment and In­frastruc­ture Fund, in association with sovereign wealth fun­ds and global fun­ds, can scale up at a faster pace. Fur-ther, reigniting private sector participation in the infrastructure space can help bridge the fin­ancing gap and achieve the NIP targets.

PASF Team, SBI Capital Markets

The Gati Shakti plan is expected to drive a number of infrastructure projects to completion in the immediate future. Furthermore, the Bharat­mala Pariyojana Phase II shall enhance the str­en­gth of the project pipeline in the medium term such as development of econo­mic corridors, feeder roads, logistics park in­ter­connections. As per the Airport Economic Regula­tory Authority, domestic traffic is projected to match or exceed pre-Covid levels by 2022-23, and international traffic by 2023-24. Although yields have risen significantly over pre-Covid levels on domestic routes, the dual impact of higher aviation turbine fuel pri­ces coupled and rupee depreciation will de­lay airlines from turning profitable even in 2022-23. Indian port traffic has reached pre-Co­vid levels and is predicted to grow 4-6 per cent in 2022-23. Overall investments in the power sector are expected to grow by 50-55 per cent during 2023-27, with renewable energy generation and distribution driving investments. Telcos have embar­ked on tariff hikes that may persist in the near to medium term, given the fact that In­dia’s subscriber ARPU is still significantly lower than its peers. The country’s CGD network is an­ticipated to witness robust growth on account of the increasing number of CNG vehicles, coupled with rising population and growing urbanisation across the country. Going forward, Tier II and Tier III cities with low population densities will deploy the MetroNeo and MetroLite solutions.