Unlocking Capital: Innovative mechanisms to raise long-term infrastructure finance

B. Purushartha, Joint Secretary, Department of Economic Affairs, Ministry of Finance

As the harbinger of economic prosperity and a tool for the upliftment of the masses, infrastructure development is a key focus point of the government. Over the years, the infrastructure sectors have received both financial and policy support. In financial terms, India spends 5-6 per cent of its GDP on infras­truc­ture development, with the lion’s share being derived from government capital expenditure. Considering the budgets of the previous three consecutive years, it is evident that there has been a consistent annual inc­re­a­se of approximately 30-33 per cent in the annual capex. The Govern­ment of India’s capex has grown over threefold between 2018-19 and 2023-24.

Growth initiatives

The government views infrastructure as a catalyst for sustainable economic growth. The vision of sustainable and equitable development in Amrit Kaal requires increased vigour of sustained efforts, with a synergy between the government and the private sector. Thus, it becomes imperative for the government to pave the way for private investment by increasing the amount of capex since public capex is known to crowd-in private investment, thereby significantly accelerating infra­str­uc­ture development. This year-on-year growth in capex spending by the central government has led to a rise in private investments and an increase in capex formation in the country.  According to the Economic Sur­vey of India 2022-23, private capex investments in the first half of 2022-23 stood at Rs 3.3 trillion, witnessing a 27 per cent growth over the first half of 2021-22. Also, the gross fixed capex formation (constant prices) has increased to Rs 54.34 trillion from around Rs 48 trillion in 2021-22 – a growth of over 13 per cent in one year, and a huge growth of 65 per cent between 2014-15 and 2022-23.

The government has complemented this approach by introducing several reforms in sectoral policies and financial regulations to boost private investment in the sector. The strong macro indicators including sustained GDP growth rates, coupled with effectively managed inflation, have provided a shot in the arm to the government’s efforts to leapfrog towards higher per capita availability of infrastructure.

“The coming together of the public and private sectors for infrastructure development will help realise the noble vision of world-class infrastructure in India.”

The demand for infrastructure development and the consequent infrastructure investment is substantial. As an estimate, to realise the vision of India @2047, around 75 per cent of the required urban infrastructure is yet to be developed. The magnitude of finances required precludes complete reliance on public funds to meet the infrastructure needs of a growing India. Thus, it is crucial to actively encourage private investment. The government is deploying a bouquet of initiatives and strategies to­war­ds this objective, including the National In­frastructure Pipeline, launched in 2019 with 6,835 projects worth around Rs 111 trillion, which has now been expanded to over 9,098 projects covering 37 sub-sectors; the National Monetisation Pipeline (NMP) of Rs 6 trillion, launched in 2021 for enhancing the productivity of brownfield projects; the PM Gati Shakti National Master Plan, launched in 2021, en­com­passing projects worth Rs 100 trillion to improve multimodal connectivity; and the es­tab­lishment of the Infrastructure Finance Secretariat in 2022.

The Infrastructure Finance Secretariat, established by the Ministry of Finance, represents a not­able initiative encompassing several endeavours, including engagement with policymakers, knowledge creation and dissemination, stakeholder consultati­ons, and handholding of state and local governments and other public sector administrations for infrastructure development through PPPs, issuance of green bonds and innovative ways of raising long-term finance. This inclusive approach involves engaging with all relevant stakeholders in a systematic manner to gain insights into their concerns, identifying appropriate solutions and supporting capacity building for deploying the identified solutions.

Necessity and uptake of Structured Financing Instruments (InvITs and REITs)

Over the years, the primary source of funding for infrastructure projects has been loans facilitated by either banks or non-banking financial companies. However, this led to an asset-liability mismatch and balance sheet woes for banks, resulting in a rise in non-performing assets, hi­gher capital requirement as per BASEL III norms and increased provisioning requirement for such stressed assets. To overcome this syste­mic flaw, new investment vehicles, namely business trusts such as infrastructure investment trusts (InvITs) and real estate investment trusts (REITs), were introduced to provide refinancing/ take-out financing for bank loans. Since their inception in 2014, InvITs and REITs have em­erged as significant areas of interest for facilitating the infusion of patient capital into infrastructure projects. Among the various available investment vehicles, InvITs have exhibited no­t­able performance and possess significant potential for further growth. InvITs delink ownership and investment beneficiaries, as well as asset maintenance and investor responsibility. Thus, due to these inherent advantages, these business trusts have garnered substantial backing from policymakers as well as market players over time.

While InvITs have performed well with around 20 SEBI registered InvITs, the performance of REITs has not been on par, with only five SEBI-registered REITs till date. This has created a need to evaluate the issues causing REITs to fall behind.

The government’s commitment to free up blocked capital for reinvestment in infrastructure creation is now well recognised, with a systematic approach stemming from the NMP. InvITs are now bidding in the open market for toll-operate-transfer auctions, bringing substantial value accretions for the public authority. The bidding process for all sectors may soon follow suit. The two PSU InvITs, one being sponsored by Power Grid Corporation of India Limited and the other by the National Highways Authority of India, have also demonstrated strong performance, showcasing resilience in the face of market dynamics. Spurred by their success, several other PSUs are also contemplating utilising the InvIT route for capital recycling of their assets.

Coping with challenges

The introduction of InvITs and REITs was accompanied by several significant obstacles. One prominent issue was the absence of a framework for raising debt in the market. How­ever, over the course of time, the challenge was effectively addressed.

That said, other daunting challenges continue to persist within the domain, notably in the pursuit of harmonising the interplay between InvITs and REITs, alongside infrastructure debt funds. Both of these instruments cater to brownfield infrastructure assets. To promote InvITs/ REITs, several measures have been undertaken such as notification by IRDAI and PFRDA to allow domestic insurance and pension funds to invest in debt securities, abolishment of the dividend distribution tax, exemption of dividend payouts to REITs/InvITs from TDS, and permission for debt financing of REITs/ InvITs through foreign portfolio investors, etc.

Vantage view

Among known challenges facing the infrastructure sector in India are the lack of financing op­tions, under-utilised public assets, aging infrastructure, stressed assets, delays in clearan­c­es, approvals and land acquisition, gaps in te­ch­nical capacity and skills of infrastructure personnel, and project monitoring and execution issues such as time and cost overruns.

Currently, the classification of a sector as infrastructure is determined by a set of guiding principles laid down by the government. Such initial exercise to lay down the principles for re­cognising any asset as infrastructure or otherwise was undertaken by the Rangarajan Com­mittee, which among other things, proffered a comprehensive framework delineating the criteria for ascertaining the categorisation of assets eligible for inclusion within the purview of infrastructure. However, going forward, it is imperative to devise a more effective support mechanism that will facilitate the creation of a comprehensive definition of infrastructure. This is especially relevant because the formation of an InvIT requires that underlying assets belong to an infrastructure sub-sector as per the Harmonised Master List. In line with this, the Ministry of Fin­ance has established a committee to reassess the Harmonised Master List with the aim of en­hancing sector inclusivity to align with India’s vision of Amrit Kaal.

Similarly, in recent years, there has been a notable focus on implementing regulatory changes that aim to provide increased support for infrastructure investment, particularly thro­u­gh these innovative vehicles. Policy stability is a crucial factor to consider for InvITs and REITs, as a support mechanism is needed for the establishment of these trusts and the implementation of guiding principles.

India welcomes foreign investors to participate in the development of its infrastructu­re and contribute to its economic expansion. To this end, foreign direct investment (FDI) has been permitted under the automatic rou­te in most infrastructure sectors. India recei­ved FDI equity inflow of approximately $46 billion in 2022-23.

To simultaneously augment domestic en­gagement and mobilise domestic savings into infrastructure development, it is of utmost im­portance for sponsors and managers of the­se vehicles, private developers and investors of in­frastructure projects and public authorities to work together to achieve the vision of Amrit Kaal. The coming together of the public and private sectors for infrastructure development will help realise the noble vision of world-class in­fra­structure in India.