The government is taking significant initiatives for infrastructure development in India. The capital expenditure by the central government has increased from Rs 2.5 trillion in 2013-14 to Rs 7.5 trillion in 2022-23. A sum of Rs 1 trillion has been allocated to the state governments in 2022-23 for infrastructure development under the PM Gati Shakti Master Plan. In order to meet the National Infrastructure Pipeline target of Rs 111 trillion investment, there is a need to attract private sector participation and ensure the availability of low-cost long-term financing.
Continuing support from conventional sources
The revival of the private capex cycle has improved the confidence of the lending community. With an improvement in corporate balance sheets, commercial banks have opened up to project finance. Bank exposure to the infrastructure sector increased by over 6 per cent in 2021-22 as against a 3 per cent rise in 2020-21. The Navi Mumbai International Airport, Noida International Airport and the Meerut-Budaun Expressway were some of the big-ticket projects that achieved financial closure during the past 12-15 months. Hybrid annuity road projects, renewable energy projects and infrastructure investment trusts (InvITs) found favour among commercial banks.
Outstanding credit to infrastructure from banks and non-banking financial companies (NBFCs) registered 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 NBFCs growing at a much higher pace (CAGR of 13.7 per cent). Improving asset quality, healthy capitalisation level, reduced dependence on short-term borrowings, and increasing demand for infrastructure credit have strengthened the growth prospects for NBFCs. Besides, NBFCs backed by the National Investment and Infrastructure Fund (NIIF) witnessed a sixfold increase in their combined loan book from Rs 42 billion to Rs 260 billion in three years without experiencing any non-performing loans till date.
InvITs and real estate investment trusts (REITs) have emerged as crucial platforms for asset monetisation. While fundraising through REITs and InvITs declined by 59 per cent to Rs 221 billion in 2021-22 on account of global headwinds and stock market volatility, the instruments are only rising in importance. There are 19 InvITs (11 such structures in roads) and four REITs registered with the Securities and Exchange Board of India and many more on the anvil. The National Monetisation Pipeline estimates an aggregate monetisation potential of Rs 6 trillion and the InvIT will be a key financing mechanism in this. The government was able to complete transactions worth Rs 1 trillion in 2021-22, surpassing the first-year target. Of the Rs 1.62 trillion monetisation target for 2022-23, assets worth over Rs 330 billion have been monetised thus far with the mining sector doing the heavy lifting (Rs 170 billion). At the state level, Gujarat, Maharashtra, Karnataka, Uttar Pradesh, Madhya Pradesh and Odisha have state highways and expressways, transmission networks and state warehouses identified as potential assets.
With regard to mergers and acquisitions, strategic investors as well as private equity players have raised their stakes on the infrastructure sector with an investment of around $13 billion in the first seven months of 2022, almost 70 per cent of the deal value in 2021. The year saw key deals such as award of TOT-VII to the Indian Highway Concessions Trust, Edelweiss’s acquisition of L&T’s operational road assets, International Holding Company PJSC’s investment in Adani’s portfolio companies, among others.
Rising patient capital
Sovereign wealth funds and pension funds are bullish on the long-term growth prospects of the country. With tax breaks on infrastructure investments, this investor class is participating in innovative financing structures such as InvITs and co-investment strategy. The NIIF has also upped its game by expanding its road portfolio and foraying into e-mobility and green hydrogen.
To augment the long-term financing sources for the infrastructure sector, a new development financial institution – the National Bank for Financing Infrastructure and Development (NaBFID) – has been set up by the central bank. 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.
The national commitment to net zero carbon emissions has given rise to environmental, social and governance (ESG) project financing, the underlying theme being green and sustainable development. With India needing close to $10 trillion to meet its net zero target by 2070, there lies a huge potential for sustainable financing. Sector-wise, roads and renewables continue to remain relevant in the current times. The other emerging asset classes being explored by investors include city gas, data centres and clean mobility.