The road ahead for infrastructure financing in India looks promising despite macroeconomic headwinds. With the second wave of the pandemic significantly impacting growth prospects in 2021-22, lenders and investors continue to remain cautious. Credit growth in the infrastructure space showed some improvement in 2020-21, but the operating environment for banks remained challenging. Meanwhile, disinvestment and public asset recycling have emerged as important alternative fundraising routes. Despite a cautious stance, foreign investors continue to assume a prominent role, especially in the road, renewable energy and telecom sectors. Investments in these sectors have come through private equity funds, pension funds, sovereign wealth funds, strategic investors, and infrastructure bonds. A lot of this institutional interest has come through infrastructure investment trusts (InvITs) and the toll-operate-transfer (TOT) model. Among multilateral development banks, new-generation banks such as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank have built up a sizeable infrastructure investment portfolio in the past few years. At a recent India Infrastructure conference, industry experts shared their views on the trends in infrastructure financing, their investment strategies and the future outlook…
Kunal Agarwal
India continues to be amongst the most promising investment destinations for infrastructure among emerging markets. The long-term fundamentals for India have not changed significantly despite the impact of Covid-19 pandemic, and hence Infrastructure investors continue to place India amongst the top of their priority list. Infrastructure sector in India is attracting more investments from long term institutional capital helped by favourable and progressive policy environment, need for new infrastructure build to sustain growth and asset recycling.
Within the infrastructure universe, Covid-19 pandemic has had varying degrees of impact. For example, some sectors such as airports have been more impacted while other sector have been largely unimpacted or in some cases actually outperformed. The importance of having a diversified portfolio has never been greater than it is now. Despite the ongoing Covid-19 pandemic impact, private equity investors continue to see a lot of deal momentum. New sectors such as data infrastructure, clean-tech, electric vehicles and next-generation renewables are picking up pace, while core sectors such as highways and renewables continue to drive a majority of investment activity.
On the policy front, more sectors such as railways are opening up to long-term institutional private capital. With all the recent policy initiatives such as the National Monetisation Pipeline, one can expect continued large-scale investments from global Infrastructure investors into India.
Harshal Mhavarkar
The stance of lenders is gradually shifting from caution to optimism. This optimism is stemming from the changing macroeconomic conditions. The conducive environment that is being developed around the infra space is giving the required confidence to banks. For India to achieve its ambitious dream of a $5 trillion economy status, investment in the infrastructure space is non-negotiable. Unfortunately, India’s infrastructure spending is languishing at 5.5 per cent of the GDP, much below the target of 7-8 per cent. Lenders believe that infrastructure sectors have recovered well in the aftermath of Covid-19 outbreak. The sectors have responded well and demonstrated their resilience, e.g. traffic numbers has shown improvement as far as road sector is concerned.
Another significant development is the government’s initiative to remove roadblocks by modifying the model concession agreement, relaxing the bidding criteria to encourage competition and implementing fast tags. Above all, the National Infrastructure Pipeline (NIP) has given a sense of direction and vision to enormous investments in the infrastructure space. The recent asset monetisation plan is also beneficial to the sector because it specifies the amount and sources of capital resources that will be required to implement the NIP. There has been a major shift in the underlying infrastructure assets, with the conventional promoter equity being replaced by private/institutional equity in the infrastructure space. This has also given a lot of confidence to lenders from the governance perspective.
Credit deployment has remained largely flat with a slight improvement in financial year 2021 compared to the 2020 fiscal. Given the black swan occurrence of Covid-19, the lender community considers a 6 per cent decline in credit deployment in the infrastructure domain in 2021 as a positive, rather than a setback. For a long time, the industry has struggled with a twin balance sheet crisis, in which balance sheets of both the lender and the borrower are stressed. Starting from the third and the fourth quarters of 2021, the environment appears to be improving. From the bank’s perspective, credit deployment will also be back on track, along with the cleaned-up balance sheet. Because all the underlying infrastructure projects are long term in nature, rather than a one-year trend, a long-term trend must be observed. The lending community expects the infrastructure industry to perform quite well in the coming years. One of the major impediments to infrastructure investment is the lack of visibility of equity. Proper monitoring is the most crucial element while considering the financing of infrastructure projects. Banks have started appointing asset monitoring agencies to closely monitor the on-ground development of infrastructure projects.
A solid pipeline across the infrastructure sector, with roads and renewables leading the way, is creating reasonable opportunities for banks. Other sectors such as airports, oil and gas, and fertilisers are also providing fair opportunities. Core industries such as steel and cement are also on the rise. Overall, given the current macro economic conditions and the opportunities in the infrastructure sector, the space is expected to see higher credit deployment in the next few years.
Rajat Misra
The AIIB is a multilateral development bank, founded to bring countries together to address Asia’s infrastructure funding gap. The purpose of the AIIB is to foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and other productive sectors. It seeks to promote regional cooperation and partnership in addressing development challenges by working with other multilateral and bilateral development institutions. China holds approximately 30 per cent of the current shareholding in the AIIB, followed by India, at 8.6 per cent. In the past five and a half years, the multilateral agency has approved more than $26 billion in projects.
Green infrastructure, connectivity and regional cooperation, technology-enabled infrastructure, and private capital mobilisation are AIIB’s thematic priorities. It has set a goal of achieving 50 per cent private sector financing over the next 10 years, which currently stands at approximately 20 per cent. It also has a climate financing goal of 50 per cent by 2025, which it is on the verge of achieving. It also seeks to finance cross-border connectivity projects of around 25 per cent of approvals by 2030. The annual financing approval increased from $1.7 billion in 2016 to $10 billion in 2020, including a significant proportion from the Covid Relief Facility.
India is the destination for the biggest amount of investment, followed by Indonesia, Bangladesh and Turkey. India has received approximately $6 billion in funding for more than 25 projects, including sovereign projects and private sector projects. The energy and transportation sectors have received the largest lending, each accounting for 27 per cent of the total lending, followed by finance, urban infrastructure and water. NIIF, L&T Infrastructure Development Projects Limited, Tata Capital Limited and HDFC Bank Limited have also received funding from the agency, making for a diverse and well-diversified portfolio in India.
The AIIB has certain protections, just like any other multilateral agency, when it comes to loan recovery in the sovereign lending segment, because that lending is guaranteed by the respective governments. In terms of private sector lending, the AIIB is mostly governed by the documentation and applicable laws. One of the challenges that the AIIB faces in financing to private sector projects in India is that it AIIB has a dollar balance sheet, requiring borrowers to hedge, which leads to some uncertainty as hedging rates keep on fluctuating, based on market conditions.
Vinay Sekar
The road sector has a long history of at least 25 years of public-private partnership investments in India. This trend began in the early 2000s when international investors started financing large-scale developers and construction companies. Investors took on minority positions; however, for most sectors, they haven’t worked out well, with the airport sector being one of the few exceptions. The lesson learned is that development risk in India is extremely challenging, so the focus shifted towards operational assets. In India, managing counterparty risk is incredibly difficult. In terms of governance, Indian developers have had a chequered history. Investors then began to create their own platforms and this has proven to be a very successful investment model in India. There are specifics in each sector such as built-out portfolios in the renewables sector, while platforms in the road sector are aggregated assets that are largely dependent on bilateral acquisitions. The Asset Monetisation Programme is another important initiative that began with the road sector. TOT projects have been highly beneficial because they essentially provide quick growth prospects for operational assets.
Mergers and acquisitions, particularly in the infrastructure sector, are difficult in India due to long deal life cycles. There are multiple pitfalls starting from litigation risk, regulatory risk and counterparty risk. It is critical for an ecosystem to provide a framework that is capable of underwriting risk, as collaborating with other entities in India comes with its own set of risks. The debt workout segment should have given a plethora of investment opportunities, but has unfortunately failed to do so. The bedrocks are undoubtedly the road and renewable energy sectors, although the railway sector appears to be intriguing as well. Sectors such as airports, city gas distribution and telecommunications have also seen significant activity. From an investor’s standpoint, some industries such as roads and airports offer an opportunity to not only invest in infrastructure-type assets but also participate in consumption-led growth.
The government alone cannot be held responsible for all the conflicts in the infrastructure space. There have been disputes in the past that were caused by the developer community as well. From an investor’s point of view, NHAI has been extremely responsible. NHAI has made a concerted effort to streamline the rough edges. One of the major concerns in the past was that roads were bid out before the land was acquired, but today, authorities are much more cautious about it and they do not bid out until they have visibility on the acquisition. Meanwhile, the HAM model is an innovation that has proved to be extremely beneficial. InvITs are also incrementally transforming the way infrastructure assets are held in India. Over a period of time, a lot of infrastructure investors would transition to holding assets through InvITs.