The infrastructure financing landscape has undergone a substantial evolution, driven by financial and policy support. It has further benefited from the expanding role of global funds, and the offtake of infrastructure investment trusts (InvITs). Moreover, multilateral banks have assumed a pivotal role. The centre has taken various steps to increase private sector participation. Nevertheless, more cross-sector participation remains necessary to leverage diverse long-term credit sources. Industry experts discuss the progress in the financing landscape, emerging trends and investment avenues, the key challenges and future needs…
What have been the key trends and developments in the infrastructure financing sector over the past year?
Jyoti Prakash Gadia Managing Director, Resurgent India
India has been on a bold infrastructure drive over the past decade. Capital expenditure has skyrocketed, growing more than five fold, with the past five years seeing an impressive 27 per cent annual surge. The government’s commitment to world-class infrastructure is clear and banks have played a major role, with lending exposure hitting around Rs 12 trillion in 2022-23.
The capital market has seen over Rs 1 trillion raised by infrastructure sectors through debt and equity in 2023-24. InvITs, which had a slow start in 2016, are now gaining traction, with 24 InvITs registered by the Securities and Exchange Board of India (SEBI) as of March 2024. The year 2023-24 alone saw Rs 390.24 billion raised by real estate investment trusts (REITs) and InvITs, five times more than in 2022-23, thanks to the government’s infrastructure push. SEBI’s recent move to cut the trading lot for privately placed InvITs from Rs 10 million to Rs 2.5 million shows how the landscape is shifting.
Foreign and domestic institutional investors have also poured over Rs 750 billion into REITs and InvITs. With the rising focus on green financing and environmental, social and governance (ESG), renewable energy InvITs are emerging as a hot investment, adding momentum to the sector’s monetisation.
The National Bank for Financing Infrastructure and Development (NaBFID) wrapped up 2023-24 with Rs 1 trillion in sanctions, though it is lagging behind its ambitious Rs 5 trillion lending target announced in budget 2021. Despite previous failures in this space, NaBFID might just pull through, given the evolving ecosystem.
Prashant Murkute Executive Vice President, Axis Bank
The momentum in the central government’s total capital expenditure was maintained in 2023-24 as it clocked an impressive growth of about 20 per cent year on year. Coupled with the healthy expansion (about 19 per cent) in state governments’ combined capital expenditure, this capex push has led to a healthy demand for infrastructure credit. The infrastructure credit growth rose to about 9 per cent in 2023-24 driven by about 10 per cent growth in non-banks and about 6 per cent growth in banks. Banks have seen a decent uptick from about 3 per cent in 2022-23. The gross inflow from external commercial borrowings to infrastructure sectors grew to $9.05 billion in 2023-24 versus an average of $5.91 billion per annum from 2020 to 2023. Public infrastructure finance companies (contributing to about 53 per cent of the total infrastructure credit) clocked a five-year CAGR of about 12 per cent as against about 4.5 per cent CAGR for banks. This has led to a decline in the share of banks in the overall infra credit to about 45 per cent in 2023-24 from about 54 per cent in 2018-19. Within infrastructure, roads and power have occupied a significant share of incremental credit in the past five years, followed by other infrastructure sectors such as railways (excluding Indian Railways), telecom, airports, etc. Apart from the usual growth sectors such as roads and power, 2023-24 saw a healthy credit flow towards new segments such as smart meters and data centres.
What has been the impact of recent initiatives taken by the government and regulators to ease infrastructure financing?
Jyoti Prakash Gadia
First, the government’s aggressive push through the National Infrastructure Pipeline (NIP) and the National Monetisation Pipeline (NMP) has laid a strong foundation for sustained infrastructure development. The NIP, with its expansive project list, has become a central element in driving investment, while the NMP is unlocking the value of existing public assets by monetising them.
The India-Japan Fund, with a hefty $600 million commitment and the JICA’s massive ¥232,209 million loans are clear signs that global players are betting big on India’s infrastructure and sustainability push.
The introduction of the viability gap funding scheme has also played a key role in ensuring that essential but less commercially attractive projects can still move forward, reducing the risk for private investors and also ensuring broader participation in the infrastructure sector.
Additionally, regulatory changes such as the RBI’s new framework for provisioning, aim to mitigate risks associated with long-term infrastructure projects. However, the regulator needs to integrate mandatory climate risk assessments and sustainable practices into the draft framework.
Prashant Murkute
The newly established development finance institution, NaBFID has quickly scaled up its loan book to Rs 360 billion in March 2024 as against Rs 100 billion in March 2023. NaBFID expects to have an outstanding loan book of Rs 600 billion-Rs 700 billion by September 2024. This is expected to fill the gap in long-term infrastructure financing, while also offering credit enhancement and developing a secondary loan market for infrastructure loans. The central government has been proactive in increasing the gross budgetary support to infrastructure segments when there were concerns over leveraging of the National Highways Authority of India’s (NHAI) borrowings or when the private capex did not pick up pace. Apart from this, initiatives such as PM Gati Shakti are expected to ensure better planning and faster approvals during the project implementation phase, leading to efficient capital allocation and precluding cost overruns. Finally, concession authorities such as NHAI, the Airports Economic Regulatory Authority, the Petroleum and Natural Gas Regulatory Board, etc., have been bringing in changes to the regulatory framework post consultation with various stakeholders. Concession authorities have been swift in granting approvals post discussions with all stakeholders. For example, the release of tariff orders now takes much less time compared to a few years back. Regulators such as SEBI and RBI are playing their part in ensuring adequate safeguards and better governance in developing the market for infrastructure financing. For example, reforms in developing REITs and InvITs and expanding their market.
Which are the most promising alternative funding sources for infrastructure?
Jyoti Prakash Gadia
Governments across the globe are increasingly adopting land value capture (LVC) strategies to finance urban development projects. Countries such as Colombia and Brazil are experimenting with betterment levies, while the US and Canada are implementing impact fees in select projects. Japan and Germany, in contrast, are exploring land pooling and readjustment mechanisms as part of their urban development strategies.
In India, Hyderabad is effectively utilising LVC through instruments such as “special development charges” for projects near its outer ring road. Additionally, the city employs “development deferment charges” to generate further funding for urban infrastructure.
LVC is not just a cash cow; it is a way to ensure that the benefits of public investment are spread fairly. Right now, heavy lifting for city infrastructure is done by the central and state governments, covering over 75 per cent of the costs, while urban local bodies chip in a modest 15 per cent from their own pockets. Municipal bonds seem like a smart alternative for raising funds, especially for smaller cities. They not only help municipalities enhance their creditworthiness but also open up new investment opportunities for both retail and institutional investors.
Prashant Murkute
Monetising assets via InvITs seems the most attractive way to free up capital for developers, given the acceptance with investors due to stable cash flows. InvITs raised Rs 331.18 billion of equity during 2023-24 alone and over Rs 1,110 billion of equity overall. InvITs are poised to rope in segments such as data centres and warehousing. For energy transition infrastructure assets, various emerging options in infrastructure financing include sovereign wealth funds, credit alternative investment funds, green bonds and blended finance due to India’s ambitious plans and predictable regulatory environment. In terms of urban infra financing, 2023-24 saw a resurgence in municipal bond issuances with three issuances totalling Rs 5 billion by Pimpri (Pune), Ahmedabad and Vadodara municipalities at attractive effective coupon rates, whereby institutional investors created considerable demand. There is enough capital available for good quality long-term infrastructure assets from the likes of foreign pension funds as well. The beginning of the interest rate easing cycle should bring in more capital from developed markets chasing assets, which provide a stable cash flow, along with the potential to benefit from India’s growth.
What are some of the unresolved challenges? How can these be addressed?
Jyoti Prakash Gadia
Developers have been grappling with serious financial risks due to weak escalation clauses that do not adequately cover rising input costs such as fuel and steel. This lack of financial protection, combined with lengthy claim processes, leaves developers vulnerable, particularly in the face of unexpected events like force majeure. The situation is worsened by limited access to long-term financing, as banks and non-banking financial institutions remain cautious with their lending due to a low-risk appetite.
A report from December 2022 by the Ministry of Statistics and Programme Implementation pointed out that out of 1,454 monitored projects (each valued at Rs 1.5 billion or more), 335 faced cost overruns amounting to Rs 4.5 trillion (22.12 per cent of the original cost), while 871 projects were delayed. Common issues such as delays in land acquisition and obtaining forest and environmental clearances are prevalent across infrastructure sectors, leading to these substantial cost overruns. These overruns not only jeopardise the financial viability of projects but also strain developers’ cash flows, making banks and financial institutions even more hesitant to finance greenfield and brownfield projects.
Prashant Murkute
Limited participation of the private sector apart from roads and renewable energy: The road sector has been the leader in garnering private investments within the infrastructure space. The government was able to monetise Rs 403.14 billion in 2023-24, which was the highest ever for roads. Further, India’s renewable energy sector saw foreign direct investment of $3.76 billion in 2023-24, which was 50 per cent higher than that in 2022-23. The overall private investments in infrastructure picked up in 2023-24, with transactions aggregating to Rs 1.51 trillion in accruals or private investments getting completed as compared to Rs 2.3 trillion over 2021-22 and 2022-23 cumulatively. Given the reform push, private participation is expected to improve, going ahead.
Limited ability of contractors to further enhance skilled manpower and expertise: India’s infrastructure development has complex requirements given varied terrains across the country. However, the number of contractors who can execute complex projects timely and with adequate construction quality is low. Hence, complex projects tend to get won by a few players, while in the rest of the cases, there is significant construction completion risk, given the low experience of the contractor. These contractors often find it tough to raise money or do so at higher yields eroding returns, which increases the chances of projects getting stuck. Encouraging joint ventures with foreign players could allow domestic players to gain much-needed expertise.
Underdeveloped secondary loan and bond market: India’s secondary loan and bond market for infrastructure loans remains shallow. Allowing increased participation from pension/insurance companies to invest in infrastructure assets could result in the growth of the market.
Challenges in land acquisition amidst ever-increasing land rates: Land prices have run up considerably over the past decade, given the infra creation momentum by the government, especially in the road sector. This creates pressure on public finances and also causes protests in some cases for want of higher compensation. The estimated cost of the Bharatmala Pariyojana doubled from Rs 5.6 trillion in 2017 to more than Rs 10.6 trillion in 2023.
What is the sector outlook for the next one to two years? What are the upcoming opportunities for financiers/investors?
Jyoti Prakash Gadia
India is seeing a surge in investments in greenfield projects, particularly in ports, airports and road networks. These projects offer solid returns, especially as they integrate industrial complexes with port infrastructure, enhancing their appeal to investors.
The government also plans to significantly modernise and expand airports, with a substantial contribution from the private sector for greenfield projects in key areas such as Goa and Navi Mumbai. The goal is to significantly increase the number of airports, including new international ones, over the next few years.
Also, emerging sectors such as green hydrogen and data centres present additional opportunities. India is pushing hard to become a leader in green hydrogen, supported by the National Green Hydrogen Mission, which is drawing substantial investments. The data centre industry is booming due to increasing digitalisation, offering a low-risk, high-return investment landscape.
Prashant Murkute
The credit outlook for infrastructure remains benign, supported by the momentum in public capex, coupled with enabling reforms to attract private capital and provide a predictable business environment. India has set itself ambitious energy transition targets, which would require a continuous flow of credit. Achieving 500 GW of renewable energy capacity, getting grid infrastructure ready for that capacity, energy storage requirements of about 27 GW, energy efficiency (smart meters), etc., will entail financing requirements of over $200 billion by 2030.