Shubhangi Shukla

Infrastructure Finance Update- September 2023

The infrastructure sector has been a very dynamic space in the last few years given the push by the government on creation of infrastructure for businesses as well as to meet SDG targets. This monthly update on infrastructure finance looks at the various financing strategies being applied by the government to increase the pace of infrastructure in the country, and the mainstream discourse on its financing options.

There is heightened focus on the infrastructure sector in the last few years. It is being projected as a key sector on the road to the country’s development while also being essential in meeting the SDG 2030 targets. However, there is a gap in the need and financial resources available to meet the requirements. The increase in private investment in the sector is what is being seen as the way to overcome the challenges including in essential sectors of water, energy, linear and digital  infrastructure. The government and industry’s preference for this approach is apparent in the many steps that have been taken to increase private sector participation in recent years.

The India Infrastructure Project Development Funding Scheme (IIPDFS):  Continuous efforts are being made by the Infrastructure Finance Secretariat (IFS) in this regard. The IIPDFS was launched by the Ministry of Finance in 2017. The ‘multi-beneficiary’ scheme will support infrastructure projects by providing financial assistance (up to 75% of project development costs, subject to a maximum limit) to both government and private agencies. Apart from core project costs, it will also cover pre-investment activities such as project preparation, feasibility studies, and detailed engineering thus making it more attractive to private players.

The central government is to provide a major share of the funding for the scheme. State governments are ‘encouraged’ to contribute some portion. Private sector entities can also contribute funds or in-kind resources. The IIPDF Scheme can also seek external assistance from international development agencies for large-scale projects.

Revamping of the  public private partnership website- The website, has also been revamped by IFS to ‘facilitate PPPs’ and ‘bridge the gap between the public and private sectors’ according to a statement by the finance minister. The portal will enable the sponsoring authority to apply for IIPDF scheme online for faster processing and approvals. The updated website also contains other inputs to assist and facilitate inclusion of private investors such as featuring 200 executed concession agreements for PPP projects across various sectors, policies, PPP toolkits, guidelines, reference materials, and model bidding documents. There is also a reference guide for setting up  PPP units in the states and for appraising PPP projects.

 Reserve bank of India updates- The Reserve Bank of India (RBI) in collaboration with the Government of India also introduced updated guidelines for Infrastructure Debt Fund-Non-Banking Financial Companies (IDF-NBFCs) in August 2023. These revisions enhance the role of IDF-NBFCs in financing the infrastructure sector and align the regulations with it.  Updates include introduction of an ‘Enhanced Capital Requirement’  for entities (a minimum ‘net owned fund’ of Rs. 300 crores) to ensure investors possess the financial strength to engage in infrastructure financing.  Maintenance of a minimum ‘Capital-to-Risk Weighted Assets Ratio’ (CRAR) of at least 15%, with a minimum Tier 1 capital of 10% has also been made mandatory to safeguard the financial stability of IDF-NBFCs. Various fundraising mechanisms and forms of asset-liability management have also been introduced.

IDF-NBFCs are now authorized to raise funds by issuing bonds. They can either be denominated in either rupees or dollars with a minimum maturity of five years. This approach hopes to ensure a steady flow of long-term debt into projects. To facilitate better asset-liability management (ALM), IDF-NBFCs are also allowed to raise funds through shorter tenor bonds and commercial papers (CPs) from the domestic market. This can be extended up to a limit of 10% of their total outstanding borrowings.

Changes in sponsorship requirements have also been introduced. Previously, an IDF-NBFC was required to have a sponsor, typically a bank or an NBFC-Infrastructure Finance Company (NBFC-IFC). However, the updated guidelines withdraw the mandatory sponsorship requirement. Instead of sponsor-based scrutiny, shareholders of IDF-NBFCs will now be subjected to the same scrutiny process as applicable to other NBFCs, including NBFC-IFCs to ensure uniform regulatory oversight across the NBFC sector.

The revised guidelines also expand the eligibility of sponsors for Infrastructure Debt Fund-Mutual Funds (IDF-MFs). All NBFCs can now sponsor IDF-MFs, subject to prior approval from RBI and compliance with specific conditions.

The Indian government is also taking steps to attract international infrastructure investors. These measures include changed regulatory frameworks, offtake arrangements through central government-backed counterparties, and a variety of financial products such as toll operate transfer, InvITs, sovereign-linked commercially managed equity funds, production-linked incentive schemes, and tax benefits for large international institutional investors.

In the recent events of the G20, India and the United Kingdom jointly announced the launch of the ‘The UK-India Infrastructure Financing Bridge’ (UKIIFB) during the 12th Economic and Financial Dialogue (EFD) led jointly by Niti Aayog (a policy think tank in India) and the City of London.

A joint statement issued by Finance Minister Nirmala Sitharaman and UK’s Chancellor of the Exchequer Jeremy Hunt outlined the primary objectives of this partnership as “ unlocking infrastructure investment and leveraging the City of London’s expertise in structuring and phasing major infrastructure projects.”  Both sides noted the ‘critical role of a strong pensions sector in delivering safe retirement incomes and supporting economic growth through productive investment, including in green infrastructure’.

There is agreement amongst industry experts with the government on the mismatch between the pace of infrastructure growth and the avenues available for financing it. There is also agreement on increase in private investment being the way to mitigate this.

Some have pointed to the lack of focus on MSMEs in the infrastructure finance sector as well as the need to increase flexibility in the infrastructure financing structures and refinancing options. The market is also said to be experiencing reduced credit availability, elevated interest rates, liquidity constraints, and fewer innovations in specialized financial products. Niche areas like equipment finance and infrastructure funding sector which have been specially exposed up these during the pandemic. Gradual pre-packaged insolvency solutions, increased stakeholder participation, a focus on business revival, and the integration of out-of-court debt restructuring mechanisms alongside the formal insolvency process are some of the measures that are being recommended to tackle these issues.

‘Effective risk allocation and mitigation’, ‘long-term funding solutions’ and ‘transparent risk-sharing mechanisms’ have been suggested to boost investor confidence and attract greater private participation.

Advocates of leveraging public resources and bringing in private players vis-a-vis increase in the amount of fiscal stimulus also point at greater ‘efficiency and equity’ in infrastructure financing through ‘spreading the cost of investments over time’ and ‘sharing it with future beneficiaries’.

There is a call to also broaden the scope of understanding of infrastructure projects. Their financing should not only prioritize expansion of physical infrastructure networks, but also ensure the quality, uninterrupted delivery of services through accountable and efficient service delivery infrastructure and agencies as this also directly impacts the project’s revenue recovery. These in turn must align with sustainability and resilience goals such as climate change adaptation measures, energy efficiency improvements, and green infrastructure solutions through financing.

The primary reliance on banks for infrastructure financing, unlike more ‘advanced’ economies where they tap into the bond market may burden banks as well as limit credit availability for other sectors. Availability of infrastructure and corporate bond market for infrastructure providers is being suggested to promote ‘transparency, price discovery, and efficient allocation of capital and creation of secondary market liquidity where investors can buy and sell bonds’.

Public Development Finance Institutions (DFIs) have also been pitched as  viable alternatives to tap into financial markets and ensure investment. Development banks and export credit agencies ‘can enhance the efficiency of their limited resources by utilizing financial instruments like guarantees or mezzanine capital’. Additionally, investment funds will get access to international capital markets further increasing resource access.

There is also a suggestion for the ‘government to utilize its fiscal power to offer other mechanisms’ such as pension funds and life insurance agencies to reach out to capital markets and institutional investors. This is expected to potentially provide credit enhancement, first-loss protection, and partial guarantees to infrastructure providers and provide them with long-term access to finance from both domestic and international markets. It is also being suggested to allow the government to share investment risks with markets, relying on market assessments of project creditworthiness and incentivise investors to establish greater creditworthiness for their investments, relying primarily on market finance while government enhancements act as additional support.

Other recommendations for the sector include creation of a  dedicated nodal agency to leverage technology, strengthen the corporate bond market, finalize contractual arrangements and establish regulatory oversight. More attention is to also be given to fiscal burdens, the asset-liability mismatch of commercial banks, subdued investments in PPP projects, the investment obligations of insurance and pension funds, the need for an corporate bond market, insufficiency of user charges, and legal and ‘procedural challenges’ around land acquisition and environmental clearances.

In other updates, Bank of Maharashtra and five other companies, namely NNP Constructions Pvt Ltd, Neogrowth Credit Pvt Ltd, Mahindra and Mahindra Financial Services, Shriram Finance and India Infrastructure Finance, have floated bonds to raise up to Rs 5,241 crore on BSE electronic bidding platform. The bonds of M&M Financial Services and India Infrastructure Finance have been rated ‘AAA’ with ‘Stable’ outlook, whereas, Shriram Finance bonds were rated ‘AA+’. Neogrowth Credit and NNP Constructions bonds are rated ‘BBB’ and ‘B’, respectively.

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