Infrastructure Financing

Focusing on infrastructure as a key driver of economic growth, the government is embarking on a massive PSEs asset monetisation programme as part of Infrastructure Vision 2025. This ambitious programme is meant to raise long-term financing for infrastructure development in order to put our Covid-hit economy back on rails, and achieving the goal of making India a $5 trillion economy by 2024-25.

Vinod Behl

India faces an uphill task of meeting infra financing need of $150-$300 billion per annum. According to rating agency CRISIL, urban infrastructure and railways have the highest demand for capital. As infrastructure projects are complex with long gestation/payback period, they depend on long-term financing for successful execution. But despite infrastructure being classified as a priority sector, funding by banks is limited due to their rising NPAs and the banks inability to meet the massive capital needs of the infrastructure sector. This is also evident from the latest statistics, according to which, as many as 448 infrastructure projects with financing constraints as the major hurdle, are facing long delays, with a cost overrun of ₹4.02 lakh crore. The corona pandemic has further compounded the problem.

In view of the big funding gap in infrastructure sector, there is a need to widen the capital raising net by exploring new financing models. Kushal Kumar Singh, Partner at Deloitte, looks at a sector-focused infrastructure financing institution as a way forward to meet the challenge.

The government has taken a major policy initiative to boost long-term financing for infrastructure sector under a proper investment plan - a far-reaching step of integrating all schemes to create a ₹111 trillion National Investment Plan (NIP) with private sector contribution amounting to ₹25 trillion. Its purpose is to streamline projects and facilitate investments.

The centre, states and the private sector will together contribute to NIP. The share of states, centre and private sector is kept at 40%, 39% and 21%, respectively. And for sourcing required funds, the asset monetisation model involving disinvestment of PSUs and monetisation of idle real estate assets (including land) of central PSEs and state PSEs is being put into action. Under NIP, roads, railways, urban and rural infrastructure, energy, airports and ports will be the main focus areas, besides healthcare and education and skilling.

The road sector gets the major chunk of $271.2 billion as NIP capex, followed by urban and rural infrastructure at $255.9 billion and energy at $188.5 billion. As part of the plan to provide connectivity to boost the economy, the emphasis is also being given to railways, airports and ports, besides roads. They respectively have a capex allocation of $182.3 billion, $19.1 billion and $16.2 billion. The social infrastructure also gets a significant boost under NIP, with $28.5 billion capex for education and skilling and $20.1 billion for healthcare.

In order to give a boost to long-term infrastructure financing, the government is setting up Development Finance Institute (DFI) or National Bank for Infrastructure Development (NBFID). An initial capital infusion of ₹20,000 crore has been done for DFI, which is expected to raise ₹3 lakh crore from the market in the next few years. For this purpose, it has been given long time tax benefits to make capital raising from pension funds/sovereign funds attractive.

The DFI will also have borrowing options from RBI, banks and multilateral institutions like World Bank and Asian Development Bank. DFI, according to Assocham Secretary General, Deepak Sood, provides a unique opportunity for global fund managers to bet on infra starved India that offers significant untapped potential. Moreover, the returns on long-term portfolio in India will be far better than in the developed world. Sood believes that the success of DFI will pave the way for similar entities in future.

Another exclusive platform for infra financing - NIIF (National Investment and Infrastructure Fund ), set up in 2015 with ₹20,000 crore capital infusion by the government, is already playing a crucial role in arranging long-term finance for the infrastructure sector. By September 2020, NIIF was managing over $4.4 billion of funds. More recently, in February this year, Shanghai-based New Development Bank committed to invest $100 million in NIIF Funds of Funds (FOF).

The FOF opens up opportunity for global institutional investors to build a portfolio of growth-focused funds in India by investing in diverse sectors like green energy, social infrastructure, affordable and mid-segment housing, financial services, technology and others that support India’s growth. NIIF had invested ₹660 crore in HDFC Capital’s Affordable Housing Projects Fund, a $1.1 billion investment platform targeting residential projects in 20 top cities. The fund provides capital to marquee affordable and mid-segment housing developers at the land and project approval stage. Deepak Parekh, Chairman, HDFC, says that in the backdrop of lack of flexible long-term capital to developers of affordable and mid-segment housing, the fund will provide the much needed financing, and help address the demand-supply gap in affordable housing.

The government’s strategic plan to raise long-term finance involves linking twin reform initiatives of disinvestment of PSUs and their asset monetisation. The plan to monetise PSE assets through disinvestment, involves 274 central PSUs, a dozen PSBs, LIC and six general insurance companies. In February this year, the Department of Investment and Public Asset Management (DIPAM) had put the government’s stake in them at ₹7.3 trillion.

On the asset monetisation front, the specific plan involves monetising CPSEs assets worth ₹2.5 lakh crore over 3 years. The assets including roads, power, transmission, oil and gas pipelines, telecom towers, sports stadia have been listed across 8 central ministries. The Ministry of Railways is targeting to raise ₹90,000 crore through asset monetisation during 2021-22 by awarding 150 passenger trains to private players and redeveloping 50 railway stations.

The ministry of Roads, Transport plans to monetise 7200 km of roads through InvIts, TOT and securitisation. The operational highways worth ₹68,000 crore are to be transferred to private players under TOT by 2025. The Ministry of Petroleum is aiming for ₹95,000 crore of value to be realized by leveraging IOC’s products and gas pipelines.

The Power Ministry wants to monetise assets worth ₹7,000 crore in 2021-22.The Ministry of telecom plans to monetise assets of MTNL, BSNL and BharatNet. The asset monetisation of Dedicated Freight Corridors is also planned in phases to mobilise additional revenue for the development of railways.

The idea of asset monetisation, according to Amitabh Kant, CEO, Niti Aayog, is to allow the private sector to bring in equity to raise more debt. This will be used by the government to create more assets, thus starting a cycle of growth, which in turn will generate employment. One of these models is to monetise vast idle land banks of the PSEs. The estimated land assets of various government agencies are to the tune of 500,000 hectares, with the value of railways’ land bank to be the highest at ₹90,130 crore, followed by telecom at ₹40,000 crore and road transport at ₹30,000 crore.

The FY’22 budget had outlined the government’s intent to monetise surplus public land by way of direct sales, concessions or other means and proposed to set up a SPV. The government is seriously looking at adopting the land monetisation model of Canada Lands Company (CLC). This self financing state-owned corporation purchases surplus land from Canada’s central government departments at a fair market value. Then, there is the model of monetising sick PSU assets, for which the Department of Public Enterprises has issued guidelines. Another model which is being looked into is securitisation of assets for issuing bonds through the mechanism of REITs. The revenue from operational assets goes to these real estate trusts, which offer dividend to investors with a stake in REIT.

According to a Knight Frank India report, real estate assets owned by top 45 PSU companies have a whopping ₹1.2 lakh crore of REIT potential. Equally significant is a TOT model which is already being adopted by NHAI. Under this model, projects are bundled and given out to private entities that maintain and operate completed roads.

Foreign investors have evinced a keen interest in the asset monetisation programme of the Indian government as they have a great appetite for real estate and infrastructure. Brookfield Asset Management, the largest private equity investor in India, has a $20 billion bet on various projects in India, much of these in real estate/infrastructure.

International Finance Corporation (IFC) has shown interest in the concept of asset monetisation and DFI. Says Isabel Chatterto, Asia Pacific Regional Industry Head, IFC, “The demand for infrastructure is such in India that these structures are going to be part of everyone’s investment over the next 5 years. Particularly, the road sector in India is monetised to some extent because of the large number of PPPs based on annuity model for a long time. Further, the reformed InvITs have provided renaissance to the road sector.”

Notwithstanding the bright opportunities, there are challenges as well on the road to asset monetisation. It is a matter of concern that the overall bank credit to infrastructure is falling; the private sector investment is low and investment in PPP is going down. There is a need to boost public-private sector collaboration by providing viability gap funding or grants for PPPs and undertaking asset monetisation. More needs to be done to enhance ease of investment. There is a need for policy framework and autonomous regulation for all infrastructure sector with enabling governance.

The Kelkar Committee had suggested reforms of establishing sector-specific regulation, dispute resolution mechanisms and a national PPP policy. If these hurdles are successfully surmounted, the asset monetisation plan to boost infrastructure to ensure economic growth may well achieve its aim.

The writer is Editor, Proptoq Real estate magazine
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