INFRA INVESTMENTS set to DOUBLE in 5 YEARS

Investment in infrastructure in India has historically remained relatively low compared to other high-growing economies, averaging 5-6% of GDP over the last decade.  Infrastructure investment has a direct and a multiplier effect on economic growth. Increased investment in infrastructure is therefore an imperative for India to meet its vision of USD 5 trillion GDP by 2025.  The Government over the past few years have taken measures for increasing investments and has formulated a National Infrastructure Pipeline (NIP) which includes large infrastructure projects identified for development. The NIP envisages significant increase in the pace of investments with planned investments of Rs 111 lakh crore between FY2020-FY2025 which is nearly double of the investments of Rs 57 lakh crore made during FY2013-FY2019.

Over the last two decades, about 70% of the infrastructure investment has been funded from the public sector (Central and State Governments and public sector enterprises) while the remaining came from the private sector. However, the private sector's contribution in the infrastructure investment has been reducing over the years which has increased the requirement for Government to step-up funding. Private players participation in infrastructure investment had been adversely impacted due to legacy issues faced in the past including inordinate delays in project implementation for lack of land, clearances/approvals, etc., inadequate risk-reward allocation, lengthy and complex dispute resolution process, and limited debt-financing avenues. The major impact was witnessed in the road sector where road projects offered on build-operate-transfer (BOT) mode saw a sharp reduction in the interest from private players as most of the active players had suffered losses in their earlier investments and sizeable capital was blocked. In the last seven years, Government has taken several measures by debottlenecking various execution impediments which led to some improvement in the private sector participation through the Hybrid Annuity Model (HAM), - this involves lower execution risks as well as capital from private playeRs Many road contractors who were earlier focused on engineering, procurement and construction (EPC) contracts have also started taking up projects on HAM basis in last few yeaRs

Investments under NIP are planned to be financed through a mix of budgetary allocations from the Centre and states (42-46%), debt from banks/NBFCs/multilateral agencies/bond markets (30-38%), and 8-15% from PSU accruals, equity, and otheRs The balance 15-17% is expected to be raised from alternate financing (like new DFI), and asset monetization. To achieve the investments planned under NIP within timelines, significant growth is required in the key sources of financing. Centre and most State Governments have stepped up budgetary allocations towards infrastructure, though actual expenditure by states was impacted due to Covid-19 pandemic. Sustained increase in expenditure would be required to achieve NIP. Similarly, the avenues of debt financing also require a scale-up to meet the requirements.

The key sources of debt for infrastructure sector are Banks, Non-Banking Financial Company (NBFCs), External Commercial Borrowings (ECB), Mutual Funds, Pension Funds, Insurance Funds, Capital/Corporate Bond market, etc. Due to the long-term funding requirement of infrastructure sector, it is best suited to be financed by institutional investors which have matching long-term liabilities as well as risk appetite. However, the infrastructure credit in India is largely from Banks (mainly public sector banks) and NBFCs (mainly IFCs - Infrastructure Finance Companies), and these together are projected to finance 23-28% of the total NIP. Public sector banks had faced high stressed assets in the past with infrastructure sector also contributing to a large part. Due to this, bank's ability and interest to provide incremental lending to the sector had remained weak and will be a challenge given the scale-up expected in the NIP. The total bank credit to infrastructure sector stood at Rs 10.9 lakh crore as of March-2021, and NIP financing factors in incremental debt of Rs 9-11 lakh crore from banks towards infrastructure sector which will be challenging to achieve.

Besides the above-mentioned sources of borrowing, funding of some infrastructure projects is also from multilateral agencies like World Bank, International Finance Corporation, Asian Development Bank, Japan International Cooperation Agency, etc. The dedicated freight corridor project, high speed rail corridor, metro rail projects are some large projects which have been financed by these agencies. Besides the concessional rate of interest, these borrowings are also of long tenure which matches with the requirement of large infrastructure projects which have long gestation period. However, the funding from these agencies is for select sectors and based on sovereign backing in many cases.

Over the last few years, investments in operational projects by private equity players, and large global investors like pension funds etc. have increased either directly or through the National Investment and Infrastructure Fund (NIIF) or the Infrastructure Investment Trust (InvIT) route. InvITs have shown the potential of channelising long-term capital (like pension and insurance funds) into the infrastructure sector. Insurance companies, mutual funds and pension funds have minimal presence in infrastructure. InvITs are expected to see healthy traction in the near to medium term, supported by the track record of entities which have already floated such structures, enabling regulatory developments and focus on attracting investments into the infrastructure space. With InvITs now recognised as borrowers under the SARFAESI Act, lenders to these trusts, shall have adequate statutory enforcement options, absence of which was earlier becoming a constraint to lend directly at trust level. Further, Insurance Regulatory and Development Authority of India (IRDAI) has recently allowed insurers to invest in debt instruments of InvITs rated AA and above as a part of their approved investments, which evidences growing comfort of investors around such structures. GoI for its national monetisation pipeline (NMP) is also using these platforms for NHAI, PowerGrid and GAIL among otheRs The funds thus raised will be used towards funding new projects. Till date, assets worth Rs 1.4 trillion have been floated through InvITs. The capital raising by InvITs is also aided by the favourable view that investors have taken on the long-term revenue generation potential of infrastructure assets in the country.

Government is looking at monetizing operational infrastructure assets worth Rs 6 trillion as part of NMP by FY2025. While the monetization pipeline is ambitious to be achieved in four years; many large global investors already have some presence in the Indian infrastructure sector which will help in garnering healthy response depending on the potential returns that can be generated from the assets under monetization.

Stepping up the pace of infrastructure investment will be crucial given the multiplier effect it would have on the overall economy. With expected increase in budgetary allocations from both GoI and State Governments, setting up of new DFI, announcement of NMP to bridge the funding gap, the Government is putting in efforts to meet the huge funding requirements. The success of these initiatives and the completion of NIP would remain key to achieve the USD 5 trillion economy vision by 2025.

Rajeshwar Burla

Vice President, Corporate Ratings, ICRA Ltd

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