The government’s plan outlay for the infrastructure sector for 2017-18 has been pegged at Rs 3.96 trillion. While financiers continue to remain cautious of investing in the sector on account of stressed assets in the banking system, the government is doing its bit to improve investor sentiment and ensure faster project implementation.
A snapshot of the key trends over the past year and the outlook for infrastructure financing in the country…
- India’s macroeconomic situation has weakened somewhat during the past year, particularly since mid-2016. The country’s GDP growth slowed down to 7.1 per cent in 2016-17, as against 7.9 per cent in the previous fiscal year. This was partly on account of demonetisation which caused a temporary slump in the manufacturing, mining and construction sectors and partly due to weak investment demand. The agricultural sector was an exception, posting a huge jump in growth due to a good monsoon.
- On the interest rate front, the Reserve Bank of India (RBI) maintained a neutral stance, changing from the previous accommodative stance, in view of the uncertainty over sticky core inflation. The central bank kept the repo rate unchanged at 6.25 per cent in its first and second bimonthly monetary policy for 2017-18. However, it increased the reverse repo rate by 25 basis points to 6 per cent. It has adopted a wait-and-watch approach to see how inflation plays out after the implementation of the goods and services tax (GST).
- During 2016-17, nine projects worth over Rs 94 billion succeeded in tying up funding, much higher than the three projects that achieved financial closure in 2015-16. However, in terms of value, projects worth around Rs 407 billion achieved financial closure in the previous fiscal year. Sector-wise, all the nine projects were in the road sector. So far, in the current fiscal year (2017-18), four projects worth Rs 56 billion in the road and aviation sectors have tied up funds.
- In terms of sources of finance, bank lending to infrastructure (power, roads, telecom, etc.) declined and turned negative in 2016-17, as compared to a disbursement of Rs 402 billion in 2015-16. This is because a significant portion of outstanding loans fell into the category of restructured advances. Besides, roads remains the only appealing sector for bank lending where credit offtake increased marginally during 2016-17.
- There were also concerns regarding the asset quality of banks, especially with respect to exposure to infrastructure. Though the number of corporate debt restructuring cases declined during 2016-17, the banking system could become vulnerable if macroeconomic conditions were to deteriorate sharply. In sectors such as power, construction, telecom, shipbreaking and logistics, the aggregate debt for restructuring decreased from Rs 1,464 billion (as of March 2016) to Rs 1,098 billion (as of March 2017). According to RBI’s Financial Stability Report (June 2017), the stressed advances ratio of the infrastructure sector declined slightly from 18.6 per cent to 18.3 per cent between September 2016 and March 2017. However, iron and steel and infrastructure continued to account for the highest share in aggregate debt for restructuring.
- Lending by non-banking financial companies reported a rise over 2015-16. In 2016-17, disbursals by the Power Finance Corporation (PFC) amounted to Rs 627.98 billion, an increase of about 35 per cent over Rs 465.88 billion that was disbursed in 2015-16; SREI Infrastructure Finance Limited disbursed Rs 176.04 billion, a rise of about 21 per cent from Rs 145.33 billion in 2015-16; the Housing and Urban Development Corporation disbursed Rs 90.95 billion, an increase of about 10 per cent from Rs 82.5 billion reported in 2015-16; and India Infrastructure Finance Company Limited disbursed Rs 509.89 billion as of September 30, 2016.
- With regard to foreign borrowing, despite favourable policy measures taken to facilitate the tapping of funds through the external commercial borrowing (ECB) route, the quantum of ECBs secured by infrastructure companies declined drastically in 2016-17 due to a slowdown in credit demand. During the year, ECBs amounting to $8.17 billion were witnessed, decreasing sharply by around 52 per cent compared to $17.17 billion worth of ECBs in the preceding fiscal year. Sector-wise, infrastructure finance, power, telecom, and oil and gas accounted for around 76 per cent of the total ECB-sourced funds. Other sectors that resorted to ECBs include ports and shipping, renewable energy, aviation, roads, and the diversified segment.
- The bond market has witnessed heightened activity in the form of significant issuances and notable innovations. Green bonds and masala bonds have become popular. Companies such as NTPC, Adani Transmission Limited, and the National Highways Authority of India (NHAI) have raised funds through the issuance of masala bonds. Public sector units are also tapping the bond market more aggressively. NHAI, the PFC, the Rural Electrification Corporation, Indian Railway Finance Corporation Limited and the Indian Renewable Energy Development Agency have accessed over Rs 240 billion through the bond market during the past year.
- About 30 per cent of the total cost of a typical infrastructure project is funded through equity, which comes mainly from promoters or through private equity (PE) investments. In 2016-17, 25 deals together amounting to around Rs 250 billion were recorded in the infrastructure sector. In terms of both volume and value, the figures are lower than those witnessed in 2015-16 when a total of 27 deals worth about Rs 262 billion took place. The telecom sector took the lead in terms of deal size with a total deal value of Rs 178 billion. Other sectors that witnessed PE activity include renewable energy (eight deals worth Rs 33.37 billion), roads (five deals worth Rs 10.5 billion), and logistics (four deals worth Rs 24.81 billion). During April-July 2017-18, seven deals worth around Rs 62 billion took place in the infrastructure space, a dramatic increase of over 260 per cent in value over the corresponding period of the previous year. The uptick in PE activity in the current fiscal year is steered by optimistic investor sentiment and infrastructure developers looking to sell operational assets to PE players, pension funds and sovereign wealth funds to deleverage their balance sheets. Driven by an improved exit environment and changes in valuation expectations, a number of PE players have exited long-term investments. During 2016-17, there were 15 PE exits in the infrastructure space.
- On the capital market front, 2016-17 was marked by a lull in activity in the primary market due to a decline in initial public offerings (IPOs) by infrastructure players. During 2016-17, only four IPOs were launched by infrastructure companies. Collectively, they were able to raise about Rs 17 billion (as per the total value of public offerings), with the highest amount being raised by Mahanagar Gas Limited. These IPOs were from companies in the logistics, oil and gas, and diversified sectors. This is in contrast to nine IPOs in the previous fiscal year raising a total of Rs 56.58 billion. So far, 2017-18 has witnessed four IPOs – two by individual infrastructure companies (total issue size worth Rs 20 billion) and two via the infrastructure investment trust (InvIT) route (total issue size worth Rs 72.83 billion). Meanwhile, only one qualified institutional placement, by Deep Industries, took place in 2016-17.
- The government has been consistent in developing new sources of funding. InvITs witnessed some progress during the past year. So far, IRB Infrastructure Developers Limited and Sterlite Power Grid Ventures have successfully listed their respective InvITs on the bourses. Other players such as Reliance Infrastructure Limited, the ACME Group, IL&FS Transportation Networks Limited, and MEP Infrastructure Developers Limited plan to raise funds through InvITs. Progress on the National Investment and Infrastructure Fund, with an initial corpus of Rs 400 billion, is satisfactory. The fund is in an advanced stage of talks with two sovereign wealth funds for investments and is close to its first major deal since it was set up more than a year and a half ago. Meanwhile, infrastructure debt funds have failed to attract investors due to several impeding factors despite regulatory support.
- Growth is expected to be flat to moderate for the year 2017-18 due to slow investment recovery amid balance sheet adjustments of companies, weak revival of private investment demand and tepid external demand. That said, the economy continues to be a favourable investment destination due to the government’s thrust on the ease of doing business. Going forward, growth is expected to be propelled by institutional and economic reforms such as the introduction of GST.
- Banks are saddled with stressed assets in the infrastructure segment, which has killed their appetite for further lending. Given the issues of asset-liability mismatches and RBI’s group exposure regulations, banks may not be able to meet the needs of the infrastructure sector in the near term. It is further expected that new financing sources such as the New Dev-elopment Bank and the Asian Infrastructure Investment Bank will play a crucial role in bridging the financing gap.