The government’s promise of “Sab ka sath, sab ka vikas”’ hinges significantly on the economy’s high growth for the next few years. This growth, in turn, will be driven by increasing investments in transport, energy, telecommunications, etc. To this end, long-term financing plays a crucial role. Continuation of the current regime has lent confidence to investors and lenders. Over the past year, infrastructure financing has improved, albeit slower than expectations.
Budget 2019-20’s flavour: Infrastructure
Budget 2019-20 has laid special emphasis on infrastructure. A number of proposals have been made to ease long-term financing to the sector, deepen the bond market and encourage public-private partnerships (PPPs). Meanwhile, the Credit Guarantee Enhancement Corporation is planned to be set up in the current fiscal year.
Signs of revival in bank lending
During 2018-19, bank lending to infrastructure revived and exhibited a significant year-on-year growth of 19 per cent. Deployment of gross bank credit to the sector stood at Rs 10.56 trillion as of March 2019 vis-à-vis Rs 8.91 trillion as of March 2018, as per data from the Reserve Bank of India. Credit growth for the infrastructure sector in 2018-19 was the highest in the past seven years, in both absolute and percentage terms. Power, roads, telecom and other sectors witnessed double-digit growth in bank lending, the largest source of funds. Since growth in the manufacturing sector is subdued, banks are more willing to lend to healthy infrastructure companies/projects. There is visible growth in the construction, affordable housing and renewable energy segments, and this in turn is driving credit demand.
Financial closures were notably more during the past year, reflecting the revival of bank credit to infrastructure. Of the 24 financial closures tracked by India Infrastructure Research, 18 hybrid annuity model (HAM)-based road projects were able to tie up funds. The financial closure of GVK’s Navi Mumbai international airport project was significant. Meanwhile, lending to renewable energy companies continued apace.
Difficult conditions for NBFCs
Tightening of interest rates, challenging macroeconomic factors, and the default of Infrastructure Leasing and Financial Services Limited shook confidence in the non-banking financial company (NBFC) space. In the second half of 2018-19, the credit quality of select NBFCs was weighed down by an increase in the cost of funding, liquidity challenges, asset quality pressures, especially on the wholesale lending book, and an asset-liability mismatch. These factors have constrained NBFC funding for infrastructure projects.
Uptick in bond issues
As far as the bond market is concerned, bond issuances for the infrastructure sector are finally picking up. Over the past 15-18 months, a higher offtake for bonds was reflected by the higher number of issuances. The majority of these were in the form of private placements through private companies. Also, most of the bond issues were from the power and road sectors. During 2018-19, India Inc. raised a total of Rs 6.1 trillion via the private placement of corporate bonds, slightly higher than the Rs 5.99 trillion mopped up in 2017-18. Meanwhile, in the past 12-15 months, the country’s approximately $7 billion green bond market has witnessed issuances from Greenko Energy ($950 million), the largest such issuance in Asia, the State Bank of India ($650 million), Adani Green Energy ($500 million), ReNew Power ($375 million), etc. With regard to municipal bonds, of late, there has been some activity with issuances coming from Pune, Hyderabad and Indore. Between June 2017 and July 2019, seven municipal bonds were issued raising a total of about Rs 12 billion. In a noteworthy move, recently, the Kerala Infrastructure Investment Fund Board successfully raised Rs 21.5 billion via its debut masala bonds, the first state-level entity to come out with an offshore capital market issuance.
Surge in private equity funding
The year 2018-19 was a remarkable one for private equity (PE) and venture capital (VC) deals. PE and VC investments in infrastructure more than doubled to Rs 751 billion across 54 deals, as compared to 36 deals worth Rs 333 billion in 2017-18. Investments were driven by mega deals (of over Rs 50 billion), increasing dry powder (uninvested capital) and rising average deal sizes. The ongoing financial year (2019-20) is expected to fare even better with 23 deals already able to garner Rs 348 billion in PE funding during the first four months. The renewable energy and logistics segments attracted the maximum number of deals. Marquee investors such as GIC, Brookfield Asset Management, Cube Highways and Infrastructure, and Macquarie stepped up their investments in the country’s infrastructure space, mostly through controlled investments. One of the reasons for this surge is the rising interest in yield-generating assets.
Emerging avenues
There has been a rising trend in platform investments in the infrastructure sector. Sovereign wealth funds (SWFs) and PE players have shown keen interest in acquiring stakes in sector-specific platforms such as LOGOS India Logistics Ventures (logistics), Hindustan Infralog Private Limited (ports and logistics), Resurgent Power Ventures (power) and the National Investment and Infrastructure Fund (NIIF)-Roadis, the platform for road projects.
Infrastructure investment trusts (InvITs) have finally taken off. Over a span of two years, the country achieved what had been spoken about for two decades – to have long-term capital enter infrastructure assets and make it a yield play. The road and power sectors were among the first to witness platform investments via the InvIT route. There are two publicly listed InvITs (Sterlite Power’s IndiGrid and IRB Infrastructure Developers’ IRB InvIT Fund) and two privately placed InvITs (Larsen & Toubro’s IndInfravit and Oriental Structural Engineers’ Oriental Infratrust).
Besides roads and transmission, another area which is seeing some action in the InvIT space is renewable energy. Recently, Piramal Enterprises signed an agreement with the Canada Pension Plan Investment Board to co-sponsor India’s first renewable energy-focused InvIT. Besides, telecom and oil and gas players have also jumped on the InvIT bandwagon. In what is acclaimed as the single biggest PE deal in the country, Brookfield Asset Management signed a pact in July 2019 to invest Rs 252.15 billion ($3.66 billion) in Reliance Jio’s tower assets housed under an InvIT.
Dry primary market
Fundraising through initial public offerings (IPOs) slowed down markedly during 2018-19. There were nine IPOs raising Rs 14.74 billion of capital, as compared to 12 public floats garnering Rs 70.6 billion in 2017-18. A number of small and medium enterprises, particularly in the logistics space, tapped the primary market for funds. The past year also saw railway public sector undertakings such as RITES Limited, Ircon International Limited and Rail Vikas Nigam Limited being listed on the bourses, in line with the government’s intent of meeting its disinvestment targets.
The way forward
The government aims to make India a $3 trillion economy in 2019-20 and a $5 trillion economy in the next few years. As per the Economic Survey 2018-19, the country needs to spend 7-8 per cent of its GDP on infrastructure annually. This translates to annual infrastructure investments of $200 billion. However, so far, only $100 billion-$110 billion has been spent annually on infrastructure, leaving a deficit of around $90 billion per annum. Given the fiscal constraints that leave less room for expanding public investment at the scale required, there is an urgent need to accelerate the flow of private capital into infrastructure. PPPs, that have taken off in the road sector with the introduction of HAM, are the way forward. Issues such as dispute resolution, contract approvals and risk allocation need to be addressed to encourge such partnerships.
The winning of the first toll-operate-transfer (TOT) bundle by Macquarie has set a good example of public asset monetisation. This is a precursor to more such offerings in other sectors such as airports, ports and transmission. TOT is a good mechanism for professionalising assets and freeing up government capital. Plans are on the anvil for the creation of National Infrastructure Credit Enhancement Limited, an entity for financing infrastructure that will seek to bolster lower-rated bonds issued by companies. The entity will attract insurance companies and pension funds for long-term financing.
While the recent budget announced a capital infusion of Rs 700 billion for public sector banks to improve the lending scenario, banks are still short of capital to meet capital adequacy norms. This is indicative of the systemic flaws that have culminated in the mounting sour debt and overleveraged balance sheets. Therefore, alternative funding sources need to coexist and gradually outperform commercial banks for infrastructure financing.