Infrastructure financing, asset monetisation and the increasing importance of the environmental, social and governance (ESG) parameters—a strategy that integrates these themes would generate higher infrastructure investment, thus making the whole more than the sum of its parts. In this way, the Covid-19 pandemic could prove to be an opportunity to build back (more and) better
By Kumar V Pratap
Lately, there have been three recurring themes of discussion on infrastructure. One, India needs to spend more on infrastructure to be able to ascend to a higher growth path, so very necessary to fulfil the aspirations of its young population. Two, project risks go down substantially from construction to operation stage, and so there is an opportunity for public sector project sponsors to go in for asset monetisation to be able to invest more on infrastructure. And three, there is a need for higher institutional investment into infrastructure as bank financing of infrastructure is suboptimal because of its innate asset-liability mismatch.
To be able to attract more institutional investment into infrastructure, the environmental, social and governance (ESG) parameters of infrastructure projects need to be acceptable to institutional investors.
While India spent 7.2% of its GDP on infrastructure in the Eleventh Five Year Plan (2007-12), this number has come down to about 5% of GDP in 2019-20. As infrastructure investment has an impact on GDP growth both from the demand side and the supply side, the government has launched its first-ever National Infrastructure Pipeline (NIP) with data on 6,847 projects to be implemented over the six-year period ending FY2024-25, adding up to an investment of Rs 111 lakh crore. This is more than double the infrastructure investments that the country has seen in recent years and is, therefore, an ambitious target, but one which is attainable through innovative initiatives, including asset monetisation.
The financing plan of the NIP expects about 5% of the Rs 111 lakh crore to be sourced from asset monetisation at both the central government and the state government levels, which, I think, is a gross underestimate.
Asset monetisation involves the transfer of operational assets to institutional investors (pension, insurance and sovereign wealth funds), who very often partner with an asset operator to make the venture sustainable.
The two asset monetisation models used in India—Toll-Operate-Transfer (ToT) and Infrastructure Investment Trusts (InvIT)—have garnered over Rs 80,000 crore so far and there is scope for much more as asset-rich public sector entities such as the NHAI and the Power Grid are setting up their own InvITs, while the NHAI also has government approval for monetisation of over Rs 1 lakh crore of road assets through the ToT model.
For incentivising these asset-rich public entities to part with their best and core assets through asset monetisation transactions, there is a need for a policy tweak by making available the resources garnered through asset monetisation to the very same public entities that make their assets available for asset monetisation. If the resources garnered through asset monetisation get into the Consolidated Fund of India, there would be little incentive for the asset-rich public sector entities to part with their best assets through asset monetisation transactions.
Operational infrastructure assets are past the land acquisition and environment and forest clearance stages, and therefore de-risked for passive institutional investors, who are attracted by the long-term steady returns with low correlation to business cycles, making them ideal assets for portfolio diversification.
However, despite these desirable features, in general institutional investors have been quite circumspect about investing in infrastructure, scared by the complexity and political risk involved in such investments, with only about 1% of the total available institutional investment going into infrastructure. But this seems to be changing.
As per the Private Participation in Infrastructure database of the World Bank (ppi.worldbank.org), although private sector investment amounted to only $21.9 billion in 128 projects in the first half of 2020, thereby dropping by an unprecedented 56% from the corresponding period in 2019 due to the Covid-19 pandemic, institutional investors had a relatively large role, contributing 28% to total investment, compared to their negligible contribution up to now. In consonance, we find the Canadian pension funds and institutional investors (CPPIB and CDPQ) to be very active in the Indian infrastructure space.
Given this new-found institutional investor interest in infrastructure investments, one strategy that could reinforce this interest would be to frame infrastructure as an ESG investment that produces positive environmental, social and governance outcomes. The rising focus on environmentally and socially sustainable outcomes for infrastructure investment not only has the potential to improve lives, but also ease the ability to attract the capital needed to fill the infrastructure investment gap (World Economic Forum 2021).
Focusing on ESG also makes financial sense. The McKinsey Global Survey on valuing ESG programmes finds that 83% of C-suite leaders and investment professionals expect that ESG programmes will contribute more shareholder value in five years than today. In the sign of the times, Norway’s $1.3 trillion sovereign wealth fund blacklisted 15 companies in 2020 for ethical (corruption, human right violations) or sustainability (environment damage) reasons.
CDP, an international non-profit based in the UK that helps companies and cities disclose their environmental impact, finds that an increase in extreme weather events such as floods, droughts and cyclones risk souring debt of more than Rs 6.2 trillion ($84 billion) at India’s biggest financial institutions, including the State Bank of India (Rs 3.83 trillion) and the HDFC Bank (Rs 1.79 trillion).
Focusing on ESG would direct more institutional investment into operational infrastructure assets, which are the focus of asset monetisation. Therefore, a strategy that integrates these themes would generate higher infrastructure investment, thus making the whole more than the sum of its parts. In this way, the Covid-19 pandemic could prove to be an opportunity to build back (more and) better.
The author is joint secretary (UT), Ministry of Home Affairs, and former joint secretary (Infrastructure Policy & Finance), Ministry of Finance. Views are personal