The government expects Rs 25,000 billion investment into India’s infrastructure sector in the next five years, creating almost five crore jobs, road transport and highways, and shipping. How, in your opinion, would this affect the infrastructure financing and development companies

Infrastructure development continues to be a priority for the country, particularly in view of the large gaps that currently exists in various infrastructure sectors. However, the investment requirements for infrastructure are humungous and means have to be found to mobilize such resources. Given that the bond markets are yet to fully develop in the country, the financing opportunities will squarely lie with the commercial banks and infrastructure finance companies. Accordingly, these finance entities can expect to grow their loan books at a faster pace. The operation of the National Infrastructure and Investment Fund (NIIF) can prove a catalyst. Ideally, India Infrastructure Finance Company Ltd (IIFCL) which has been set up by the Government with exclusive mandate to provide infrastructure financing and companies like IL&FS should be able to ramp up their operations by introducing innovative financing mechanisms. There is also interest among the municipal corporations to come up with muni bonds which will provide opportunities for financing urban infrastructure. Infrastructure assets recycling through initiatives like InvITs (Infrastructure Investment Trust) and REITs (Real Estate Investment Trust) too will help refinance infrastructure projects on a long term basis enabling growth for the urban infrastructure sector. Overall, it can be expected that the operating environment for the infrastructure financing companies will be favorable in the medium term.

The banking system is currently burdened with approximately USD120 billion stressed assets and there is unavailability of funds at cheaper rates. What can be expected from policy makers to address this critical issue to initiate investment in infrastructure sector

Stressed assets with the banking system is a legacy issue. In the infrastructure sector, assets have become stressed due to a variety of reasons viz. highly leverage borrowers, over enthusiastic lending by commercial banks who were eager to grow their balance sheets and policy impediments leading to various projects getting stalled. Delay in Government clearances, land acquisitions, claims settlements from NHAI and contractual issues in release of payments has largely affected Road, Power and other sectors. While various steps have been taken by the banks, Reserve Bank of India and the Government of India to address the issue, the current situation requires that banks overcome their hesitation in lending to infrastructure projects and the Government should provide a facilitating environment to revive the PPP framework. The Kelkar Committee has made various recommendations for reviving PPPs which may be implemented. With inflation remaining range bound, the interest rates are likely to ease further. The demonetization initiative has led to banks having flush of funds and over the medium term, this could help in reducing funding costs. But what is important is that banks should support the infrastructure sector by providing adequate funds.


India is seeking investment fund from countries such as Japan, China and Russia. Which are the steps taken to attract foreign investors for funding India’s infrastructure sector

Currently, Foreign Direct Investment (FDI) is allowed 100% in almost all the infrastructure sectors. With India continuing to remain attractive investment destination, capital flows can be expected to continue. During 2000-2016, India attracted FDI worth USD 424 million. One of the major sectors which has benefitted from such inflows is construction and infrastructure. Some of the sovereign wealth funds and private equity funds (eg: Singapore, Qatar and Russia etc.) have shown interest in investing in Indian infrastructure projects.  The SWFs can now co-invest in infrastructure projects and also in the NIIF. RBI has already allowed foreign investments in collective investment vehicles like REITs, InvITs and AIFs. The road sector is witnessing a revival, while the investment opportunities are emerging in the airport, railways and port sectors. Further, the smart cities programme will further provide opportunities to attract foreign investments.

The last year’s Union Budget had proposed a total outlay of Rs 2,212 billion for the infrastructure sector. What are your expectations from the Union Budget 2017, and its impact on infrastructure financing space

We can expect strong emphasis on investment in infrastructure sector in the Budget 2017. Part of the gains which is expected out of the current demonetization drive can also be channeled into infrastructure development through appropriate budget proposals. One way to do this could be to increase the corpus of the NIIF as putting emphasis on EPC framework.

Instruments such as masala bonds and green bonds are being used for infrastructure financing. What kind of response are you receiving from investors willing to park their money into infrastructure space

Introduction of the Masala bonds by the IFC is gaining traction with more Indian entities raising ECBs through such instruments. RBI has now allowed Indian banks to issue such bonds for financing infrastructure and affordable housing. Masala bonds are in their infancy and going forward, this could be a game changer for raising external commercial borrowings for infrastructure financing, much the same way as the success of the dim sum bonds issued by China. RBI has also reduced the minimum maturity period of such bonds from the earlier 5 years to 3 years now.

Which segments in the infrastructure sector are witnessing strong investor interest? What is your observation about renewal energy sector

As mentioned earlier, the road sector is witnessing a revival. Similarly, opportunities are emerging in the airport and port sectors. With the smart cities programme, there will be growth opportunities for urban infrastructure projects in various states. As regards renewable energy sector, with a target of 175 GW by 2022, the Government is emphasizing on rapid development of the RE sector. Reports indicate that solar tariffs have fallen by 33% in the last two years and this trend can be expected to continue. For instance, the Solar Energy Corporation of India’s mega tender for 500 MW rooftop projects has received bids ranging between Rs 3/kwh and Rs 6.89/kwh under the Resco model. There are indicators that tariffs will continue to fall given the high volumes, increasing competition and better regulatory environment. According to Bridge to India report, sub Rs 4/unit is a realistic tariff level. At the same time, there have also been views that such levels of tariff is unsustainable. There are fears that while tariffs are south bound, the investors may not get the desired returns. For sustainable tariffs, it is imperative that the PLF is increased and the project costs come down.

The government has set a target to construct 100 smart cities. What kind of traction are you observing in this space

Out of the 100 smart cities identified, now, 20 cities have been selected for implementation of the programme with the funding of Rs 10 billion. These cities have been selected on the basis of submission by the city under the smart city proposal for (a) development of a specific area and (b) development of the entire city. However, the development of specific area would be essentially scheme for land monetization. Second, the SPV structure is to be adopted for the implementation of the programme which can prove advantageous in allowing private investors to limit risks they take and improve their returns. However, the SPV may by-pass the elected municipal council convergence between various policy measures viz., Swachh Bharat Mission, Housing for All, National Urban Renewal Mission etc.

 


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