Infrastructure Development: A Look At Funding Options

The basic feature of infrastructure project funding is that the debt is given generally by a consortium of lenders on a 'non-recourse' basis

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The urgent and crucial development of the infrastructure sector with a holistic and integrated approach has been well recognized by the government of India, as is evident from the series of steps taken during the last few years. The announcement of INR 100 lakh crore 'Gati Shakti Plan' is the latest step in that direction, to encash upon its multiplier effect benefits on the economy.

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The conventional fashion of funding infrastructure assets such as roads, ports, etc., has been by way of direct government funding under the traditional engineering procurement and construction (EPC) mode. Under the EPC model, projects are funded out of the respective budgetary resources of central or state governments. However, due to limited resources available with the government, private players were encouraged to participate through the PPP (public-private partnership) model. This inter alia led to the evolution of various funding mechanisms and structures for the development of infrastructure.

Funding structures and options

The basic feature of infrastructure project funding is that the debt is given generally by a consortium of lenders on a 'non-recourse’ basis. This implies that the project is funded on the basis of the assets of the project and cash flows generated from the project only, without any recourse to the promoter group/balance sheet of the promoter or sponsor. Typically the funding is for a long tenure ranging from 15 to 25 years depending on the terms of the award of the project or 'concession agreement' given by the concerned government authorities to the private developers.

Given the long-term nature of infrastructure projects, long-term finance from insurance and pension funds, etc., are ideally suited for meeting the requirements. But their role is limited at present in India, as we still do not have a robust and deep bond market. Infra projects are largely being funded by commercial banks and some specialised NBFCs.

Primarily, one of the major risks involved in infra finance is at the construction phase, with issues such as availability of land (right of way), regulatory and environmental clearances, etc., lot of road and other projects got delayed or were struck for such reasons, which lead to comparatively high NPAs in infra sector.

However, for the successfully completed projects, which are running successfully, new avenues of funding have emerged in the eco-system leading to fresh opportunities for the development of infrastructure.

Emerging Avenues Of Funding

The emerging avenues are in the shape of 'take out’ and 'refinance funding’ with opportunities like INVITs (infrastructure investment trusts), which are similar to mutual funds and also infrastructure debt funds (IDFs). The renewable energy sector has emerged with a big funding story, because of the global emphasis on ESG (environment social and governance) compliances, with some of the large Indian players garnering funds through overseas green bonds. Similarly, global pension funds, private equity funds are showing interest in a stake in successfully running projects through the FDI route. These funds are available at comparatively lower costs and replace the existing rupee debt. This, in turn, helps in the fresh recycling of funds by banks to fund new infrastructure projects, including those under the 'National Infrastructure Pipeline'  and the latest 'National Hydrogen Mission'.

In addition, funds are also available by way of strategic investment from NIIF set up specifically for this purpose, by the government in 2015.

Another option that is envisaged, is through the mechanism of 'Credit Enhancement Guarantee Facility' for issuance of bonds at competitive rates to reduce the cost of borrowing.

A major step has been taken by the government for setting up a separate Institution for funding infrastructure bypassing the NaBFID bill in Parliament in March 2021. However, making timely availability of sufficient resources for this shall be crucial.

Forex Reserves As a Source For Funding of Infrastructure

Foreign exchange reserves are assets owned by RBI in the shape of foreign currencies, mainly US dollars, gold, etc. Over the period, these reserves have increased to a robust level of $620 .576 billion as of 30 July, 2021, as against a small amount of $5.8 billion in March 1991. These reserves mainly act as a buffer or cushion against external stress on the economic front to protect our currency and international trade-related issues from events like the Asian financial crisis of 1997, the global financial crisis of 2008, etc.

Whether these reserves can be put to use for long-term infrastructure projects is a subject matter, requiring further thorough discussion with various pros and cons to be weighed. The modalities thereof are not very easy to evolve. While a direct allocation out of these reserves may not be simple, we can think of using a separate portion, carved out of these reserves as a specific fund. This special fund can be used at least as a support/substitute for hedging activities of financial institutions engaged in infrastructure funding. This will be indirect support to partly reduce the burden of such institutions which can be correspondingly passed on to infra developers. All in all, if any workable mechanism can be evolved, it shall provide a big boost to infrastructure development, which is the urgent need of the hour.