India has set a target to become a US$30 trillion economy by 2030, needing substantial investments in the infrastructure sector. According to the Infrastructure Year Book 2023 by Crisil, India is projected to invest Rs 143 trillion for infrastructure between fiscal years 2024 and 2030, which is more than double the Rs 67 trillion spent in the preceding seven financial years starting from 2017.
To raise the finance required to strengthen the nation’s infrastructure development, a recent Reserve Bank of India (RBI) report underscores the strategic importance of asset monetization as a viable means. Highlighting sectors such as transport and power as potential areas, the report suggests that India could effectively unlock the value of its infrastructure assets, curtail holding costs, and reallocate limited public funds toward new projects.
The government recognizes that private sector participation is critical for realizing this goal. To attract investments from the private sector, the government has gone beyond conventional methods of infrastructure investment and established new structural frameworks. Investments from foreign investors who are bullish on India and keen to participate in projects beyond the road sector and renewables, diversifying their infrastructure portfolio can further bolster funding.
Incentivizing investments: The government has implemented an income tax exemption for investments made by Sovereign Wealth Funds (SWFs) and Pension Funds (PFs) in the infrastructure sector. Income in the form of dividends, interest, and capital gains resulting from investments in specified infrastructure activities by SWFs and PFs have been exempt from income tax.
Asset recycling: The government launched the ambitious asset monetization program, the National Monetisation Pipeline (NMP) in 2021, which aims to generate Rs 6 trillion in revenues over a four-year period. Re-evaluating and repurposing existing brownfield infrastructure assets, such as toll roads, airports, ports, rail, and electricity transmission maximizes returns on initial investments, creating more efficiency in allocation of resources. Also, asset recycling taps into the private sector’s operational and managerial efficiencies, harnessing their competencies in optimizing the functionality of infrastructure projects.Under the umbrella of asset recycling, toll-operate-transfer (TOT) and Infrastructure Investment Trusts (InvITs) have emerged as effective means for monetization.
TOT: National Highways Authority of India (NHAI) has been using the TOT model as part of its strategy to mobilize resources for further infrastructure development. Since the launch of the TOT model in 2018, NHAI has successfully completed ten rounds of road asset monetization covering around 2300 km , raising an impressive amount of more than 42,000 crore These achievement has solidified NHAI’s prowess in asset monetization through TOT and laid the groundwork for extending this model to various sectors outlined in the NMP, including railways, power transmission, telecom, gas pipelines, ports, airports, and more.
InvITs: InvITs have achieved significant success with marquee investors such as Canadian PFs, SWFs and large infrastructure funds, setting up their own InvITs as well as investing in those set up by Indian private developers and public sectors companies such as NHAI and Power Grid Corporation of India Ltd (PGCIL). However, the pace of expanding the asset base has experienced a slowdown.
Despite the evident interest from investors to participate in asset monetization, a key impediment lies in the limited availability of assets. For instance, in 2019, the Government of India awarded six airports through a 50-year concession, attracting bids from foreign strategic and financial investors. It was announced that about 25 airports would be monetized in the NMP, creating excitement among investors. However, the government has not yet launched processes for any of these airports, making it difficult for investors to formulate a long-term investment strategy for India.
Way forward: building a stream of projects and replicating success stories
Attracting investors precedes investments. A comprehensive and transparent approach to project identification, evaluation, and execution are essential to build investor confidence and foster long-term partnerships. India needs to create a steady stream of projects beyond the road sector and renewables and develop customized packages for private investment to attract capital.
In summary, capital is available and so are acceptable and proven transaction structures. All that the government needs to do to pave the way for a robust and diversified infrastructure monetization ecosystem is make projects available on a regular basis.
(This article has been written by Jitesh Khatrani, Investment Banking Partner (Infra), EY.)