Financing The National Infrastructure Pipeline: Innovation To Be Key In The Post Pandemic World  

While the country was waging a grim battle against the Coronavirus outbreak, the government made a bold statement amidst this crisis.

The final report of the task force on National Infrastructure Pipeline (NIP) was unveiled for the 2019-25 period.

The final report projects a total infrastructure investment worth Rs 111 lakh crore during the said period.

Energy (24 per cent), Roads (18 per cent), Urban (17 per cent) and Railways (12 per cent) sectors accounted for around 71 per cent of the projected infra investments.

The Centre (39 per cent) and states (40 per cent) are expected to have an almost equal share in implementing the projects, while the private sector has a 21 per cent share.

Sources of financing

The Task Force report deals at length on the financing of the NIP (page 245).

• About 18-20 per cent of the NIP is expected to be financed through the Centre’s budget,
• 24-26 per cent is expected to be financed through the states’ budget, while
• 31 per cent would be raised through debt from bond markets, banks and NBFCs,
• Equity from private developers, external aid multilateral and bilateral agencies and internal accruals of PSUs would comprise 4-10 per cent.

The existing sources would be able to finance 83–85 per cent of the capital expenditure to be incurred between fiscals 2020 and 2025.

Some proportion of the financing gap can be filled through establishing new Development Finance Institution (DFI) and using asset monetisation as a tool to monetise operational assets at both central and state levels.

Deep dive into Assumptions

Let’s delve into the key assumptions that will go into financing the NIP (2020-25) as per the Task Force report.

The Centre and State budgets will finance in the range of 42-46 per cent, Infra NBFCs that include, PFC, REC, IRFC, IREDA, IIFCL and private sector NBFCs (15-17 per cent), and Banks (8-10 per cent). This together with PSUs’ internal accruals, bond and equity markets, multilateral/bilateral sources among others would round up t0 83-85 per cent of the sources.

The report says that there would be an overall shortage of 8-10 per cent of the total Rs 111 lakh crore financing.

However, if we go into the granularity of assumptions, one factor that stands out is the Centre and States’ budgetary outlay as percentage of GDP which is at 1.25 per cent and 1.75 per cent respectively.

Also, if we add, public NBFCs which are assumed to grow at 12 per cent, private NBFCs at 15 per cent and commercial banks’ credit to Infrastructure to grow at an average of 8 per cent, this looks on the higher range, especially with the decimation of the economy by the Coronavirus pandemic.

The bond market issuance has been assumed at a growth rate of 8 per cent — given the de-growth in recent past.

As the pool of high credit rating issuers are limited, incremental supply of credit through the bond markets may be tempered.

Equity from FDI and step-up in National Infrastructure Investment Fund (NIIF) investments have been assumed to grow at 15 per cent.

At NIIF, a substantial increase in investment has been assumed, as it picks up pace.

FDI flow of funds to the infra sector is Rs 9,500 crore per annum over fiscals 2016-18.

The Task Force also notes that significant sums of money are spent on infrastructure through central sector schemes and finance commission grants.

These are often provided to state governments/ UTs under the revenue heads of accounts.

The government grants under the budget should be effectively used as equity multiplier to syndicate domestic equity sources and leverage debt in the market.

This could be possible if the budgetary support is channelised through commercial bodies corporate like NHAI.

This would make possible achieving the yearly financing target of Rs 20 lakh crore.

Given the massive fund requirements in various infrastructure sectors in the coming years, innovative ways of financing need to be explored.

One potential avenue as suggested by the Task Force is efficient usage of the Central Road and Infrastructure Fund (CRIF), which is earmarked for various infrastructure sectors such as transport (road and bridges, ports, shipyards, inland waterways, airports, railways, urban public transport), energy, water and sanitation, communication and social and commercial infrastructure, as per the provisions of the CRIF Act, 2000, amended by the Finance Act, 2019.

The funds for various infrastructure sectors are to be earmarked as per the provisions of the above-mentioned Act.

The CRIF received Rs 1.13 lakh crore in fiscal 2019 and Rs 1.2 lakh crore in fiscal 2020.

The CRIF is a significant source of equity for infrastructure.

Since the CRIF is singularly dependent on petroleum product surcharges on excise duty and taking into account the long-term negative outlook on oil consumption, a futuristic plan to strengthen and diversify sources of revenue for CRIF needs to be planned with a view to providing a robust long-term revenue stream for financing the NIP.

Recent push for Global money into Infrastructure

Since the last budget, the government has been channelising global money into Infrastructure.

This sector requires long term and patient investors who would stay invested and buy into the India growth story.

The government had introduced a special regime for Infrastructure Investment Trusts — REITs for infrastructure projects, and special private equity fund (NIIF) to raise capital for infrastructure projects.

Global Sovereign Wealth Funds (SWF) and Pension Funds (PF) have shown interest by investment in NIIF and infrastructure projects.

In the last five years, these investor classes have made investments to the tune of $32.8 billion.

As it is seen that infrastructure sector generally requires a huge upfront capex and has generally a long gestation period.

Hence, the rate of returns in the sector is generally very low.

Further, taxes could also impact the returns. Many investors have been clamouring for a complete tax exemption in respect of their investment-linked income.

Recently, in order to make the investments attractive, significant tax exemptions have been introduced in the Income-tax Act in terms of dividends, interest and long-term capital gains earned on investments in specified infrastructure sectors.

However, with the recent pandemic, the subsequent lockdown will have a deep impact on the Indian economy with a huge decline in the growth numbers in this as well as the next fiscal.

In order to attract global players, especially SWFs and PFs, it would require a radical change in terms of allowing Private Equity funds onto specific Infra projects.

Way forward: The pandemic headwinds

Looking holistically at the financing models, the Task Force has done a diligent task. However, the macroeconomic scenario has and is undergoing a tectonic shift with no clear end in sight as the pandemic sweeps through.

Indian economy has been caught at the epicentre of a perfect storm wreaked by Coronavirus pandemic.

The government had to go in for extended lockdown, which was unprecedented globally.

The key is by when the economy recovers and what shape will the recovery be: U, V, W or Swoosh these are all unknowns the policymakers and governments are grappling with.

Infrastructure is the sine qua non for kickstarting the economy and could be India’s potential ‘New Deal’ which will have a multiplier effect on the economy.