Financing infrastructure

India's infrastructure deficit can be reversed only by development finance institutions that have the domain expertise to both borrow and lend long-term

The National Infrastructure Pipeline (NIP) laid out a blueprint for expenditure of Rs 102 trillion over the 2020-25 quinquennium to change the infrastructure landscape in the country. Conspicuously lacking, however, were measures for mobilising funds to finance such a whopping requirement, particularly in the face of the yawning fiscal deficit, the limited lending capacity of banks, an underdeveloped bond market, the current state of the capital market and the week finances of companies. The Union Budget has missed yet another opportunity to comprehensively address issues that are core to infrastructure development in the country.

The NIP has estimated the share of the private sector over this five-year period at Rs 22 trillion, front-loaded, as against an investment of Rs 2-3 trillion per year in recent years, which is drying up. In this backdrop, the Budget was expected to announce measures impinging upon the institutional framework, financing instruments and products, and fiscal incentives to step up the pace and scale of private sector investment.

The Budget has proposed isolated measures like increase in limits for foreign portfolio investment in corporate bonds from 9 per cent to 15 per cent (while the existing limit is utilised by only 58 per cent) and extending the concessional tax rate of 5 per cent on the interest income of non-resident Indians on masala bonds for another three years. These are welcome, but will have little incremental impact. Amid bottlenecks in infrastructure projects, it is to be seen how far tax exemptions on income on long-term bonds and equity will incentivise sovereign funds to invest in infrastructure.

The above and a few other similar measures will hardly boost the much-needed growth of the corporate bond market. In the past as well, ad hoc and half-hearted measures taken, for example, in regard to infrastructure investment trusts (InvITs), real estate investment trusts, credit enhancement, and participation of pension funds and insurance companies, have not helped. In fact, the Budget proposal to tax dividends in the hands of unit holders/investors will prove counterproductive for the growth of InvITs at a time when these are showing green shoots and expected to grow five-fold in the next two years.

It is therefore not surprising that the corporate bond market in India is smaller than even those of countries such as Thailand and Malaysia in Asia. The potential for the corporate bond market is evident from estimates that increase in its size from about 16 per cent of gross domestic product to 20 per cent in the next five years will release an additional Rs 30 trillion for private sector investment. This would, however, need a suitable institutional apparatus, regulatory reforms, and introduction of new instruments and a hedging mechanism.

The Budget has failed to provide direction on how debt finance of the size envisaged in the NIP and for tenures of up to 20-25 years would be made available on a non-recourse basis for infrastructure projects, in both the public and private sector. Infrastructure projects raise 45-80 per cent of their funding requirements from commercial banks which, ironically, do not have the domain expertise to lend to infrastructure projects.

Learning from the failure of commercial banks, as is evident from mounting non-performing assets, it was expected that the Budget may announce the setting up of development finance institutions (DFIs) that can borrow long-term and lend long-term, with a better understanding of the risk profile and distinctive characteristics of infrastructure projects. The Budget proposes to fund a government-owned DFI, namely, India Infrastructure Finance Company Limited (IIFCL), to leverage private sector investment. But the efficacy of the measure is questionable, as IIFCL, set up in 2006 for financing infrastructure projects, has so far not had any impact, because it lacked autonomy to act as a vibrant financial institution. DFIs with ownership and management structures like those of the erstwhile Industrial Credit and Investment Corporation of India are needed to match the challenges.

The National Infrastructure Pipeline has laid out a blueprint for spending Rs 102 trillion between 2020 and 2025, of which the private sector’s contribution will be Rs 22 trillion

The success of small finance banks also suggests that infrastructure banks should be set up, following the horses-for-courses approach adopted by the Reserve Bank of India in recent years. These banks would have domain expertise and raise long-term deposits to lend long-term. Infrastructure finance companies currently reeling under an acute asset-liability mismatch and funding constraints may be asked to transit to infrastructure banks over a period of one to three years.

Last but not least, private sector investment hinges on ease of setting up infrastructure projects and their continued viability. As many as 386 projects have been delayed by more than one year and beyond six years. Investors are extremely concerned about risk and uncertainty surrounding regulations and regulatory actions, contract enforcement, delays in obtaining approvals and realisation of dues from concessionaires that are government entities.

In the last decade, India has rolled out one of the largest public-private partnership programmes (PPP) worldwide. The experience of the PPP model at the ground level has, however, been far from satisfactory because of imprudent allocation of associated risks between the public authority and the private partner, and an inefficient dispute resolution mechanism.

It is necessary that the government lays emphasis on confidence-building measures before extending the PPP model to other areas of economic and social infrastructure, as proposed in the Budget, by providing for a framework for time-bound approvals, coordination between implementation agencies, enforceability of contracts, timely resolution of disputes, and fast-track implementation of stalled projects.

Considering the enormity of the challenges, it is time for the government to create a separate ministry for infrastructure development that will also focus on the structural reforms needed for financing infrastructure projects. Otherwise, the NIP as an instrument for achieving a $5 trillion economy will remain an illusion.   

The writer is former managing director, PTC India Financial Services