India’s infrastructure has been traditionally financed through budgetary support from central and state governments or by large public sector undertakings. Several projects have been part-financed by multilateral agencies as well. Previously, projects were largely undertaken on an item rate basis or in engineering, procurement and construction mode. While these continued to remain the dominant methods of project implementation, during the post-liberalisation era from the late 1990s to the early 2000s, the Government of India (GoI) started attracting private sector investments through the public-private partnership (PPP) framework for infrastructure development. Under this, capital (both equity and debt) was to be raised by the private sector player. During the initial PPP years, the debt avenues for infrastructure entities were fairly limited, with a high reliance on public sector banks and a few non-banking financial companies (NBFCs) and all-India financial institutions.
Consequently, the outstanding bank credit to the infrastructure sector increased by over a hundred times, from Rs 72 billion in 1999 to Rs 7.8 trillion in 2013. However, with the increase in stressed assets, the growth in bank credit to infrastructure slowed down in the following decade. As of May 2023, the outstanding bank credit to the infrastructure sector stood at Rs 12.2 trillion, reflecting a compound annual growth rate of approximately 4.5 per cent between 2013 and 2023.
Apart from banks, infrastructure finance companies (IFCs), which are infrastructure-focused NBFCs, were instrumental in extending credit to the infrastructure sector. In 2006, the GoI established a new IFC – India Infrastructure Finance Company Limited (IIFCL) – to provide long-term debt capital to infrastructure projects.
Over the years, the GoI, along with the financial sector regulators, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), has taken several measures to widen the sources of capital for the infrastructure sector. Some of the key initiatives undertaken are as follows:
- Takeout financing scheme: From April 2010, the RBI allowed banks/financial institutions to refinance existing project loans through full or partial takeout financing, even without a pre-determined agreement with other banks/financial institutions, and fix a longer repayment period. The takeout financing is not considered a restructuring in the books of the existing and new lenders, provided the stipulated conditions are met. In June 2016, the RBI extended this scheme to NBFCs, thereby allowing them to participate in takeout financing for infrastructure projects.
- Credit enhancement scheme: This scheme was initially launched by IIFCL to provide partial credit guarantees to enhance the credit rating of bonds issued by infrastructure companies to AA or higher to facilitate the refinancing of existing loans. The minimum stand-alone credit rating of the infrastructure project/proposed bond structure to be credit enhanced needed to be BBB, and the infrastructure project should have achieved commercial operation date (COD)/provisional COD as of the date of extending the guarantee/credit enhancement. In September 2015, the RBI also allowed banks to provide partial credit enhancement to a project as a non-funded subordinated facility in the form of an irrevocable contingent line of credit, which would be drawn if there was a shortfall in cash flows for servicing the bonds, thereby enhancing the credit rating of the bond issue.
- Infrastructure debt funds (IDFs): IDFs were first announced in Union Budget 2011-12 as an additional avenue for lending to infrastructure projects. In May 2015, the RBI amended the guidelines to broaden the mandate of IDF-NBFCs and allowed them to invest in non-PPP projects and PPP projects without a project authority that had completed at least one year of satisfactory commercial operations.
- External commercial borrowing (ECB) norms relaxation: In November 2015, the RBI issued new guidelines for ECBs, categorising them into three tracks. Companies in the infrastructure sector were classified as Track II, which enabled them to raise ECBs with a minimum maturity of 10 years.
- National Investment and Infrastructure Fund (NIIF): The NIIF was conceptualised as a sovereign-backed fund and was registered with SEBI as a Category II Alternative Investment Fund in December 2015. The GoI’s aggregate contribution to the NIIF amounts to Rs 200 billion and a similar amount is proposed to be raised from third-party investors such that the GoI’s contribution would be 49 per cent in each fund managed by the NIIF.
- Infrastructure investment trusts (InvITs): In September 2014, SEBI introduced the SEBI (Infrastructure Investment Trusts) Regulations, 2014. Over the past few years, as the regulations have evolved, InvITs have become the preferred avenue for several long-term global capital investors, such as pension and insurance funds, to invest in India’s infrastructure assets. The InvIT structure has gained healthy traction, with multiple issuances, including those by GoI entities such as Power Grid Corporation of India Limited and the National Highways Authority of India (NHAI). Between April 2019 and June 2023, a total of Rs 890 billion was raised through the InvIT route and is expected to play a pivotal role in releasing developers’ capital from operational projects for further deployment in new endeavours. ICRA Limited anticipates continued growth for InvITs, with assets worth Rs 2.5 trillion likely to be monetised through this route over the medium term.
- New development financial institution (DFI): To augment long-term financing avenues for the infrastructure sector, a new DFI – the National Bank for Financing Infrastructure and Development (NaBFID) – was set up in 2021. The GoI infused Rs 200 billion of capital into NaBFID and by leveraging this, it expects to provide sizeable funding for infrastructure projects over the medium term.
These measures have helped improve the availability of capital for the infrastructure sector. However, a deficit persists in meeting the infrastructure financing requirements of the country. In addition to the aforementioned measures, the GoI has identified a series of assets to be monetised – the National Monetisation Pipeline — to augment resources for infrastructure creation. This initiative is expected to meet approximately 5-6 per cent of the financing requirement for the Rs 111 trillion National Infrastructure Pipeline.
Challenges and future focus areas: Encouraging PPPs and widening financing avenues
To ensure an efficient and sustainable pace of infrastructure development, encouraging private sector investments is crucial. In this regard, stable regulations and policies, coupled with equitable sharing of risks, will help attract private sector investments in infrastructure projects. The government has taken several measures to increase private sector participation in infrastructure development, which has undoubtedly helped reduce bottlenecks in project implementation and improve the investment environment. However, private sector participation is still not widespread and remains limited to only select infrastructure segments such as roads and power.
A key challenge in PPPs is the dismal track record of dispute resolution. Despite several efforts to address this concern, the arbitration and dispute resolution process remains quite cumbersome and time consuming. Many infrastructure projects suffer due to non-adherence to concession agreement clauses such as protection from alternative routes/modes, state support and availability of land/approvals, especially in projects where the concessioning authority is a state government or a municipal body. This subsequently leads to claims or disputes and a prolonged resolution process. To instil confidence in lenders through protective clauses in PPP projects, there is a need to strengthen the arbitration and dispute resolution mechanism as well as establish strict timelines for liquidation, settlement of termination payments and penalties. Additionally, there is a need to foster financial discipline and ensure full compliance with the conditions outlined in the concession and loan agreements.
Further, with the increase in infrastructure investment needs, the avenues for long-term credit to the sector must be scaled up. Strengthening the corporate bond market with increased retail participation can help channel public savings into the infrastructure sector. In the recent past, bond issuances by infrastructure players (for instance, NHAI InvIT) have received a positive response, indicating that investors have the appetite to invest in such bonds and that this route can be explored further. A ramp-up in lending by NaBFID can help bridge the gap to an extent. Besides, InvITs can help in attracting long-term capital into the sector, which will help in churning developer capital and, therefore, enable developers to take up new projects. The NIIF can play a key role in channelling long-term equity capital into the country’s infrastructure sector.
While the infrastructure development requirements are huge, it is essential to also focus on the quality of project execution, players’ capacity building, and mechanisms to check aggressive bidding. In the past, the sector had witnessed high stressed assets, which negatively impacted not only the pace of project implementation but also the sentiment towards the infrastructure sector, thereby making debt financing difficult for infrastructure projects. As the sector recovers from the previous down-cycle, it is important that caution is exercised with regard to aggressive bidding, as this could potentially lead to the failure of players and strain the financial system.