INDIA: Guiding Growth through Infrastructure Development

India, today, is at a very strategic inflexion point of greater economic prosperity. India's journey on the path of economic reforms has transformed it to one of the world's fastest growing large economies. Infrastructure has been one of the cornerstones in the development of the country with exponential growth over the past decade. 

The 'New India' has an evolved outlook towards infrastructure development in the country. There has been a paradigm shift in the approach towards building infrastructure in India, from need based to an integrated long-term development strategy. All infrastructure sectors in India provide excellent opportunities with Public Private Partnerships (PPP) identified as the most suitable mode for implementation and funding of most infrastructure projects in the country. 

In the past decade, India has invested over USD 1.1 trillion in building infrastructure. The strategy of the country had been to build core infrastructure for easing logistical movement, increasing energy capacities to ensure high quality uninterrupted power supply to businesses and invest in connectivity to ensure that the 1.3 billion people are connected to each other through mobile connections and high-speed internet. This has been achieved through a very interesting mix of Public Private Partnerships and private investments in feasible infrastructure investments and budgetary investments in non-feasible but high social return projects.

India has achieved this growth in infrastructure development by constantly building world class Development Finance Institutions, High quality PPP contracts, enabling laws and regulations and most importantly, the execution capacity to deliver the scale of these projects.

National Infrastructure Pipeline

The next phase of India's infrastructure growth now targets to include core plus and opportunistic infrastructure growth which is focussed on 'Ease of Living' for the 1.3 billion people. The National Infrastructure Pipeline has now set forth in motion India's target to achieve USD 5 trillion GDP by 2025 by investing over USD 1.4 Trillion in infrastructure sub-sectors. These investments will be targeting for 100 per cent coverage for safe drinking water, access to clean and affordable energy, healthcare for all, modern railway stations, airports, bus terminals and world-class educational institutes.

The National Infrastructure Pipeline focusses on taking infrastructure growth to the bottom of the pyramid with ease of living for every individual in the country. The aim is to execute the National Infrastructure Pipeline by bringing together resources of central and state governments as well as capabilities and capacities of private investors to deliver at a fast pace.

National Infrastructure Pipeline focuses on core infrastructure sectors as well as social infrastructure sub sectors such as hospitals, schools, agricultural infrastructure to ensure impact is long lasting and all encompassing.

Sectoral Breakup of National Infrastructure Pipeline

The Roads and Highways sector of India has been exemplary in establishing public private partnerships in the country. With a plan to double national highways in India to 200,000 kilometres, the 'Bharatmala Pariyojana' was launched for developing 66,100 kilometres of additional road network including expressways, economic corridors, international and border roads. Innovative financing models such as recycling of existing and operational roads are being implemented to generate funding for greenfield road construction. 

India was clocking a consistent double-digit growth during the pre-covid period with domestic aviation market setting the country to become the third largest aviation market in the world by 2027. To meet the huge demand, 100 new airports will be built over the next 15 years and 400 existing airports will be upgraded.  

 The Railways sector in India has also opened up to 100 per cent FDI in railway infrastructure segment and has been now opening up for PPP across railway stations, private train operations etc. To augment freight traffic, six dedicated freight corridors are being built to minimise freight movement time. Seven High Speed Railways (HSRs) are also being built across the country with the first one already under implementation.

Significant physical infrastructure is being created to accommodate the growing population of India through the “Housing for All Mission” by building 100 new Smart Cities, rejuvenating 500 existing cities and providing affordable houses to all by 2022. 

India is targeting 39 per cent of its 619 GW of energy in 2025 to come from renewable energy, which will require a three-fold growth in the sector from the existing installed capacity of 90 GW. The country is also well placed to provide piped water to every household by 2025.

Enabling private investments in infrastructure

The USD 1.4 Trillion National Infrastructure Pipeline is projected to attract 22 per cent of its investments from private sector. In value terms, an investment of over USD 300 Bn needs to be attracted from private sector over next 5 years. Over last few years, the country has been working in a dedicated manner for rationalized risk sharing mechanisms to attract private capital into infrastructure development.

India has built a very strong PPP framework over last two decades including development of Model Concession Agreements and bid documents, high quality viability gap funding schemes, strong banking, and financing institutions and most importantly, capacities in the private sector for delivering the quantum of infrastructure that are required for bridging the infrastructure gap.

Over last few years, efforts have been made to address the key risks and issues that had created an overhang on projects which led to distress in the past. For instance, the National Highways Authority decided to award highway projects which had at least 90 per cent land availability and 80 per cent environment clearance in place. This step alone drastically reduced delays in new highway project completion. Similarly, institutional mechanisms have been put in place to address the coordination issues among various departments of the government. The project monitoring group has also been a very important step in resolving the issues of infrastructure projects on a fast-track basis. Introduction of commercial courts and National Company Law Tribunal (NCLT) has fast tracked litigation leading to risk reduction for private sector investing in infrastructure.

In order to create a strong secondary market for infrastructure assets, attract institutional investments and make up for shortage of equity to infrastructure projects, National Infrastructure and Investment Fund (NIIF) was launched with an initial investment of USD 3 Bn by Government of India. NIIF has since attracted global funds like OMERS, ADIA, CPPIB, Temasek to deploy capital in Indian infrastructure assets. Introduction of InvITs has further added impetus for global funds to invest into Indian Infrastructure as well as allowing retail investors to participate in India's infrastructure story.

To further give impetus to private investments in the county, the government has established a new asset class in the country by recycling of revenue generating operational infrastructure assets. The Toll Operate Transfer (TOT) project under this model has been recycling operational roads of the National Highways Authority of India (NHAI). In the first bundle, NHAI identified nine of its operational tolling roads and bundled them together, giving away the right to toll them for thirty years along with responsibility to operate and maintain the roads, to a private party. Australian Fund manager, Macquarie won the bid for these assets at a quote price of USD 1.5 Bn as against the base price set at USD 1Bn by NHAI. Since then, 3 more bundles have been bid out to domestic and international investors. Various other asset classes are now emerging in the country under asset recycling including the six of country's airports which were privatized in 2019 and another 30 which are in pipeline until 2025.

To brace for the increased requirement of debt funding and introduction of more innovative lending practices backed by technology in the country, the government is now launching the National Bank for Financing Infrastructure and Development as the principal development financial institution (DFI) for infrastructure financing.  NaBFID will be providing long-term finance for such segments of the economy where the risks involved are beyond the acceptable limits of commercial banks and other ordinary financial institutions. NaBFID's functions will include extending loans and advances for infrastructure projects, attracting investment from private sector investors and institutional investors for infrastructure projects and facilitating negotiations with various government authorities for dispute resolution in the field of infrastructure financing. NaBFID targets to have a lending portfolio of USD 70 Bn in a short time period of three years and will provide crucial support to overall funding of the National Infrastructure Pipeline.

Institutional Investments in Infrastructure

Institutional investors including Sovereign Wealth Funds, Pension Funds and Private Equity are becoming very active players in the Indian infrastructure growth story.  Investing in infrastructure assets, characterized by long-term contractual arrangements and regulation, is a means to reduce portfolio risks through diversification, and to access higher risk-adjusted returns for institutional investors. These investors also expect infrastructure to provide additional benefits, such as inflation-linked returns and long-term stable cash flows. Institutional investors have increasingly participated in the financing, building and operating of infrastructure through public-private partnerships. The aggregate value of global infrastructure investments reached its highest level in 2016, with USD 413 Bn invested. Investor appetite for infrastructure has grown steadily since the global financial crisis. Long term patient capital owners are increasingly adding infrastructure to their asset allocation.

The progressive PPP framework in the country has attracted various institutional investors to include India in their infrastructure allocations. Additionally, India now offers a very mature secondary market for exits, which adds to the attraction of the market. Canadian pension funds are a case in study. Canada represents 9 percent of the total universe in respect to assets under management and is home to some of the largest and most experienced infrastructure investors. Five major Canadian investors (Brookfield, CPPIB, Fairfax, CDPQ and PSPIB) have invested over USD 40 Bn in India focussing on national highways, airports, real estate and logistics assets. To date, these investors in aggregate control over 1000 kilometres of national highway concessions, network of telecommunication towers and gas pipelines, one airport, multiple logistics assets and a significant chunk of commercial real estate in the country. All these funds have directly or indirectly established their presence in India and with dedicated teams which are growing very fast.

The most tangible evidence of a nation's progress is its infrastructure. The world has witnessed how highways turned around the US economy, how ports and shipping gave the much-needed impetus to China. It is now India's turn.

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