By Shivam Bajaj
The answer to the success of the National Infrastructure Pipeline (NIP) lies in institutional investors backing projects at the development stage of their life cycle, while domestic retail investors participate in the secondary market for operational and revenue generating assets.
At the heart of the government’s plans to make India a $5 trillion economy lies the timely completion of 9,364 projects that are valued at approximately $1.9 trillion, lined up under the NIP 2019-25. In particular, the success of India’s manufacturing sector and the focus on “Make in India” are directly influenced by how strong the backbone of India’s infrastructure is. However, the biggest challenge to implement this pipeline might be the huge financing gap, which is estimated to be more than 5% of the gross domestic product (GDP). To bridge the gap in infrastructure development, access to the massive pool of global institutional capital for under-construction projects is key.
To its credit, the government has left the field wide open for the private sector to seize this once-in-a-lifetime opportunity and complete these projects on a mission mode. However, it is a no-brainer that domestic capital—both the public and private sector put together—may find it difficult to meet the funding requirement of this quantum. With an annual investment requirement of approximately `1.4 trillion (BE 2022-23), it is probable that conventional sources of finance may face a shortfall in meeting this massive funding need. Neither the government with its borrowing programme of over `14.31 trillion in the current fiscal, nor the domestic institutional investors can match such a massive demand for finance, to fund the infrastructure pipeline, leaving behind a huge funding gap to the tune of 5% of the GDP.
The government’s hands are tied as it is already straying away from its fiscal glide path risking slippages in sovereign ratings. On the other hand, a handful of domestic financial institutions that are into long-term project financing might not have the capital required to meet the funding requirement to complete these projects. Thus, a way forward to solve this financing puzzle may be to tap into the massive pool of finance from global endowment funds, sovereign wealth funds, pension funds, insurance funds, etc, that remain abundant at a global scale despite major central banks’ pivot towards policy normalisation and repeated hikes in the interest rates.
Interestingly, there are silver linings. First, infrastructure projects in India offer the right fit for the investment thesis of global institutional investors given their steady long-term revenue models and reduced volatility. Secondly, foreign investors such as infra-focused funds, insurance companies and pension funds, which look for opportunities to invest in long-term assets, have shown keen interests in investing in such assets. This is evident from the success of real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). Therefore, a robust pipeline of viable projects in the infrastructure space will indeed attract them to double down on India’s evolving infrastructure growth story.
Even though pension funds and sovereign wealth funds are already investing in India, they are investing in completed projects and already operational assets that are revenue-generating. However, to unleash the maximum potential that can be derived from foreign capital, the focus should shift towards deployment of these funds in projects in their development stage. With significant enhancement in the concessionary framework, if developers package projects in a manner which mitigates risks for capital providers, under-construction projects might appeal to foreign investors strongly. Additionally, with opportunities in the secondary market for stable and operational projects being limited, international investors should look for participation at an earlier stage of the project’s life, to secure long-term revenue generating projects for their portfolio. Retail investors, family offices, and high net worth individuals (HNIs) may invest in operational assets with low leverage; these assets could give investors the potential to earn higher returns without taking on additional risks. Hence, this route may prove to be a win-win for all—fast-tracked infrastructure development for the economy, rewarding long-term investments for global investors, and risk mitigation in the investment portfolio of retail investors in our country.
India may turn its infrastructure story inside out if developers are able to undertake successful financial engineering and structure appealing financial instruments for institutional investors. If this is achieved, the NIP may be considered a ‘mission accomplished’ and the country will undoubtedly breeze closer to the $5-trillion economy mark.
The writer is founder and CEO, Avener Capital