Indian infrastructure is experiencing significant expansion. Despite current progress, the country must strive to bridge the gap and match the infrastructural standards of advanced economies. This requires an influx of investments in order to stimulate economic growth. Although major investments are being made across infrastructure sectors, funding is primarily coming from the government, government-owned institutions such as Power Finance Corporation (PFC) Limited and Indian Renewable Energy Development Agency Limited (IREDA) and multilateral banks. Of late, several non-banking financial companies (NBFCs) have also been actively lending to the sector. In the future, a crucial area for improvement lies in the capacity to effectively attract private funding to back key infrastructure projects.
Despite significant progress in terms of alternative infrastructure financing sources, the majority of them are yet to make the intended impact. This is primarily due to factors such as the lack of enthusiasm among domestic investors to invest as well as the lack of awareness about their future prospects.
Need for new routes
In a move to reduce dependence on government spending, the Ministry of Finance, in collaboration with the Reserve Bank of India (RBI), has made concerted efforts to secure long-term finance for infrastructure projects. For a long time, these efforts yielded limited success due to the constraints faced by institutions with long-term financial resources, such as insurance companies, pension funds and provident funds (PFs), in participating in infrastructure projects. These constraints arose due to the stringent criteria for projects to have an “AA” or “AAA” rating, which led to the formation of NBFCs.
Over the past year, the amount of funding extended by banks and NBFCs fell within the bracket of Rs 1.5 billion-Rs 1.75 billion. Through a mathematical lens, India’s GDP stands at approximately Rs 3.8 trillion, with a notable allocation of around 6 per cent towards infrastructure. Approximately 25 per cent of this funding is projected to come from the private sector and public-private partnerships (PPPs). Of this, it is anticipated that 70 per cent will be in the form of debt, totalling approximately Rs 32 billion. This leaves a financing gap of around Rs 12 billion to be procured from alternative channels.
The role of debt funds in India is unparalleled. They engage in the recycling of capital through platforms such as infrastructure investment trusts, while also mitigating construction risks. These platforms facilitate the transfer of completed assets to a higher-tier vehicle, enabling developers to recycle their capital. Given India’s ambitious goals, this alternative route of funding has assumed utmost importance, especially in the road and power sectors.
Key financiers
Based on the sovereign wealth fund concept, the National Investment and Infrastructure Fund (NIIF) manages three equity funds. India Infrastructure Finance Limited, an NBFC registered with the RBI, operates under one of these funds. Currently, it possesses a book value of over Rs 200 billion and is primarily focused on green energy, including solar, wind and hydropower. Since its inception, it has maintained a record of zero non-performing assets (NPAs) and days past due. Recently, it has developed a new product to mitigate resource risk.
India Infradebt Limited is an infrastructure debt fund (IDF)-NBFC that was established by two main sponsors, ICICI Bank and Bank of Baroda. Upon receiving an “AAA” rating, the IDF-NBFC has successfully secured investments from insurance companies, pension funds and PFs.
Another prominent player in the Indian infrastructure market is the International Finance Corporation (IFC). It collaborates closely with the World Bank to provide sovereign funding and assistance in policy reforms. During the 2010s, the renewable energy sector in India experienced significant growth, spearheaded by IFC. It effectively persuaded the commercial banking industry of the commercial viability of this field. Currently, according to IFC, green hydrogen and green ammonia are poised to experience further growth. As India allows private sector involvement in transmission– a practice less common in other geographies and emerging economies – IFC plans to continue investing in this sector while simultaneously exploring opportunities in battery storage. Furthermore, IFC has identified 23 cities that meet the necessary conditions to secure loans from commercial institutions.
Exploring potential
The NIIF aims to achieve the objective of mobilising funds from previously untapped sources. To this end, it has persuaded some family offices, such as Azim Premji’s, to allocate a portion of their resources towards infrastructure development via bond issuance. Apart from this, insurance funds, pension funds and PFs have yielded positive results in terms of infrastructure investments. However, they face regulatory constraints that limit their ability to invest directly in infrastructure projects. This is because they are permitted to only fund assets rated “AA” and above, whereas most of the infrastructure projects typically fall within the “A” or “BBB” categories. In an effort to address the situation, the NIIF raises funds from family offices, which are then subsequently channelled into infrastructure asset creation. Another approach is to employ the services of a guarantee company to enhance the ratings of projects, making them more appealing for investment.
Disintermediation is another prevailing concept. This suggests that a certain ratio of the project investment requirement can be divided into strip structures, encompassing various bond tenors such as one-year, two-year and three-year bonds, extending up to a maximum tenor of 20 years. In the initial three-year period, the entity most favourably positioned to offer funding at the lowest cost would be mutual funds. This strategy ensures a balanced long-term approach and stimulates interest among diverse investor groups.
The reinstatement of section 80CCF of the Income Tax Act, commonly known as tax-saving bonds, could also serve as a supportive measure. Under this, retail investors are eligible for a tax benefit, wherein they can avail of a deduction of up to Rs 20,000 on their investment in infrastructure bonds. Another untapped route is corporate treasuries. The Securities and Exchange Board of India guidelines mandate that corporates raise a specific quantum of funds through the bond market. The potential influx of funds from corporate treasuries, if effectively directed towards infrastructure development, represents an additional source of capital.
In the US and Europe, there are approximately 14 and 25 impact funds respectively. This exhibits a keen inclination towards green energy, specifically pumped hydro and power storage. The NIIF is currently engaged in the allocation of these funds towards infrastructure development, with the aim of mitigating the financing gap.
Additionally, the sovereign wealth fund has raised funds via the employees’ provident fund as well as educational institutions. In a recent development, the NIIF successfully secured funds from educational institutions such as the DAV School and IIM Bangalore. Funds have also been procured from the EPF of the US embassy in India. Recently, the RBI permitted IDFs to raise external commercial borrowings from foreign entities. In line with this development, the NIIF is currently engaged in negotiations with several foreign institutions regarding the potential issuance of green bonds, sustainability bonds and blue bonds.
Mitigating challenges
India exhibits a notable level of advancement, as evidenced by the maturity of sponsors, proven technology in the industry and the replication of Indian practices in other geographies. Despite this, the Indian infrastructure sector faces challenges but consistently works towards mitigating them.
Key challenges in the sector have been land acquisition issues and environmental approvals. Additionally, fuel supply issues have contributed to around 40 per cent of NPAs. In order to address this, the plug-and-play system has been introduced for solar park projects, facilitating seamless execution. Under this system, the government assumes the responsibility of acquiring land and providing other utilities. Additionally, since the introduction of the hybrid annuity model for road projects, the government has injected equity into projects, thereby eliminating the risk associated with promoter equity.
Infrastructure IDFs offer long-term financing at fixed interest rates. The profit and loss statements of infrastructure projects indicate that the largest component on the expense side is interest. Given that this is fixed for the period, the interest risk has also been mitigated.
The maintenance of an adequate financial buffer is of utmost importance for infrastructure lenders. It is crucial to have sufficient working capital and debt service reserves, particularly for renewable energy projects, because if offtakers postpone payments due to cash flow problems, the project remains unaffected.
Based on a panel discussion between Suvek Nambiar, Managing Director and CEO, India Infradebt Limited; Jason Pellmar, Regional Industry Manager, Infrastructure, South Asia, International Finance Corporation; and Shiva Rajaraman, CEO, NIIF Infrastructure Finance Limited, at a recent India Infrastructure conference