The importance of infrastructure development in stimulating sustainable economic growth can never be overstated. It is for this reason that the over Rs 100-trn National Infrastructure Pipeline (NIP) announced by the Centre a few months back is likely to play a key role in India’s economic standing in a post Covid world.
However, for the NIP to be implemented within envisaged timelines, mobilising adequate private financing is essential. Government finances are already constrained due to reduced tax collections and the economic fallout of the pandemic. In 2020-21, the original budgetary outlay on infrastructure was just above Rs 4 trn, which was subsequently increased by another Rs 37,000 crore. Even if one were to assume an increase in budgetary outlays in subsequent years, it is quite likely that as much as 60-70% of the total NIP outlay of Rs 100 trn may require private financing.
In addition to the quantum of investment, the other key requirement is longer tenure of financing. Most infrastructure projects require at least 10-15 years for recouping target returns and while banks have been meeting a large part of the infrastructure financing needs, the underlying asset liability mismatches has led to stress in the banking system. Experience in other countries has also demonstrated that long-term sources of finance like pension funds and insurance companies are better suited for infrastructure financing.
Infrastructure investment trusts or InvITs are one of the more recent financial instruments for attracting pension funds and insurance companies. With the Centre streamlining IT provisions for InvITs and allowing higher debt to equity levels, initial investor response has been quite encouraging. However, there appears to be considerable untapped potential when it comes to domestic pension funds and insurance companies. The total AUM for pension funds and insurance companies in India was estimated at Rs 14 trn and Rs 38 trn, respectively. The current investment guidelines for pension funds and insurance companies, in addition to specifying an overall cap in respect of investment in instruments for infrastructure financing, also limit investment to instruments with a minimum threshold rating of AA.
Careful reassessment of these guidelines while maintaining minimum safeguards may free up additional long-term resources. Additionally, the Canadian model of pension funds making direct investment in select infrastructure projects may be considered.
The other key enabler is a vibrant infrastructure bond market which supports liquidity of longer tenure bonds. Despite the government having initiated measures like increasing the FPI cap in bond markets and open market operations by RBI to enhance liquidity, trading in bond markets continues to be narrow and limited to shorter duration instruments with credit rating above a minimum threshold. A relaxation in guidelines for pension funds and insurance companies together with fast-track implementation of measures like automated order matching and seamless settlement is likely to have a significant positive impact.
There also needs to be an increased focus on improving the underlying risk profile of infrastructure projects. One of the ways to achieve this would be through increased involvement of specialist expertise in areas like project identification & structuring, feasibility assessment and defining the role of the private sector. Subsequently, the focus needs to be on timely land allotment, regulatory approvals, etc. All NIP projects should be awarded through competitive bidding to ensure cost competitiveness.For all sectors having projects which are a part of the NIP, there should be an independent regulatory mechanism to determine tariffs and subsidies, monitor service levels and resolve disputes. While this already exists in certain sectors, there may be a need to develop institutional capacity at the state and even local government level for other sectors like housing, water supply.
The writer is Partner, Leader – Government & Public Services, Deloitte India