The National Infrastructure Pipeline (NIP) 2020-25 was always envisaged to be a key facilitator for inclusive economic development by prioritising investments in a cross-country network of state-of-art infrastructure spanning roads, railways, ports, airports, urban infrastructure, irrigation, health and education. Now, around three years post its launch, while overall NIP investments have been reasonable, this has been driven primarily by the government and public investments.
Annual infrastructure investments are estimated to range between Rs 15-16 trillion over the last 2-3 years. Out of this, annual budgetary outlays from the Government of India (GoI) has contributed around Rs 3-4 trillion, primarily accounted for by roads & highways (around `60,000 crore), railways (`80,000 crore), urban development (`60,000 crore) and rural water & sanitation (`65,000 crore). State governments are estimated to have contributed around 22-23%, with banks & NBFCs accounting for another 21-22%. Private sector investments have, however, been limited to 20-25% of aggregate investments during this period.
In 2023-24, projected infrastructure investments under NIP are around Rs 15.4 trillion. There is also expected to be an additional back log of around Rs 12-13 trillion from 2020-22 primarily due to shortfall in investments on account of Covid-19, which may need to be provided for over the next two years. In terms of funding, GoI budgetary spend is not likely to increase significantly due to continued demands in terms of high fertiliser import subsidy and other social commitments like providing free ration under the National Food Security Act, assured income support under schemes like MGNREGA, PM-Kisan etc. The situation is similar for state governments which are faced with gross fiscal deficit of over 3%, which is the threshold limit under the Fiscal Responsibility Legislation. Attracting higher private financing preferably with a longer tenure thereby avoiding asset liability mismatches, therefore, becomes important. Two specific measures have been discussed below for achieving this objective.
First, the government may consider setting up a national level mechanism for facilitating asset backed securities (ABS) based on existing infrastructure loans. The designated institution can (a) purchase infrastructure loan portfolios from banks & NBFCs, including those for supporting climate friendly projects like developing additional renewable capacity, implementing mass transit projects, water & waste recycling etc. and (b) package the purchased loans into market-based ABS with differing seniority/risk levels as well as varying tenures, for offering to institutional investors through private placement. The initial equity capital of the proposed entity could be co-funded by the government together with one or more development finance institutions. The platform may be best managed by a credible and reputed investment banking-cum-fund management agency selected through a public procurement process based on demonstrated expertise and experience in this area.
The proposed facility would effectively function as take-out financing for banks and financial institutions involved in lending to infrastructure (including green) projects, thereby providing them additional funds to undertake additional lending. Subject to proper structuring of the asset backed securities, the mechanism would help to convert existing loan portfolios to different instruments with varying risk and tenure profiles, thereby appealing to a wider cross section of investors. Countries like Singapore have benefited from similar arrangements.
The second immediate intervention can be to scale up existing credit guarantee facilities for infrastructure projects being developed under public private partnership (PPP). While there are existing credit guarantee facilities for infrastructure projects, the quantum of support is not adequate vis-à-vis annual infrastructure PPP project investments. For the facility to be successful and ensure standardisation of appraisal & other operational processes, it would need to be positioned as an exclusive single window mechanism, covering all PPP projects requiring GoI guarantees.
The guarantees extended under this mechanism would need to cover (a) breach of contract risk including failure to make contractually agreed payments or implement pre-agreed tariff; (b) changes in laws/regulations; (c) delays/failure in land acquisition; (d) delays/failures in approval of licences/permits; (e) delays/failures relating to financial close; (f) termination risk etc. There would need to be a strong underlying recourse mechanism in the form of an agreement between the credit guarantee institution, implementing agency (Central or state government) and the ministry of finance, GoI to (a) release funds in the event of the guarantee being triggered due to an event of default and (b) subsequent transfer of funds by the ministry of finance to the credit guarantee institution from the budgetary allocation of the concerned implementing agency.
Operationalising the above facility is likely to increase private interest in infrastructure projects being implemented on PPP basis as it would facilitate availability of long-term financing from financial institutions. It is also likely to reduce cost of borrowing and direct government financing for infrastructure projects. Additionally, extension of guarantees to infrastructure bonds would enhance their credit assessment/rating and may lead to interest from long term investors like domestic pension funds and insurance companies which are required to follow minimum rating thresholds in respect of their investments. Similar models have been successfully leveraged in the European Union, Indonesia and some other countries.
These measures are likely to go a long way in attracting additional private investment in implementing the NIP, thereby enhancing economic growth and creating the required infrastructure network for inclusive growth in the future.
(The author is partner and leader – government & public services, Deloitte India)