It is an established fact that investments in Infrastructure have a positive multiplier effect. This is more pronounced in Developing Economies; statistics state that an investment of Rs. 1, leads to a growth of Rs. 2.14 in the subsequent year, and Rs. 3.14, thereon. The Government has rightly envisaged and allocated a spend of Rs. 143 trillion ($1.78 trillion) for the next six years; this should propel it towards India getting into a $10 trillion economy.
The question then arises how does the government finance this development?
Commercial and Retail Banks are not geared for financing such projects, for the quantum of capital is large, and the long-term nature of finance exposes them to both liquidity, and interest rate mismatches. Let us take the instance of NHAI, a great case study of building the Road Infrastructure, by tapping into Institutional Investors, both Foreign, and Domestic for Capital.
The structure that has made it possible are the “Infrastructure Investment Trusts”, or “InvITs”. It is not just confined to Highways, today developers of Power Grids, transmission of Gas, Energy, Schools and now Warehouses have adapted this structure. What makes this different is that the assets, and concessions are ring-fenced into a well-regulated Trust, managed by a Credible Manager, supervised by SEBI.
InvITs have attracted the likes of Sovereigns, Pension Funds, FIIs, and Domestic Institutions to participate in the offerings, for the structure suits their risk appetite, and the returns commensurate with their investment goals.
SEBI on its part has been very proactive, and there are plans to open this up to Retail investors, who are seeking a steady flow of returns, from a transparent, and regulated entity. An interesting aspect is that 80% of the InvITs assets need to be constructed, operational and 90% of the Cash (after expenses) need to be distributed.
These two conditions go a long way in mitigating project risk and ensuring liquidity. There are 22 InvITs registered with SEBI; with investments in Transportation, Industrial Parks, Power, Alternate Energy etc. we can only expect this number to grow. The taxation aspects are straightforward with long-term gains taxed at 10%, and distributions at the hands of the investors.
Warehousing today is viewed by firms as an essential part of their Supply Chain, and the providers of the Service, as long-term Partners rather than Vendors. The introduction of GST led to Structural changes in the Indian Economy and one of the sectors that witnessed tremendous growth, was the warehousing space.
With India being strategically positioned as a manufacturing destination, I see a greater demand for industrial space – Built-to-Suit (BTS) for Manufacturing or Assembly Plants. This could lead to developers tapping into Capital Markets for raising both Equity, and Debt, via InvITs.
Whilst I have highlighted the direct impact on the GDP, one also needs to appreciate the second order effects of investments in infrastructure – the inclusive development it creates. For instance, a 100,000 Sq. Ft of Warehouse leads to direct employment for 150 people, and indirect employment to 250+ people; a lot of employees especially in retail warehouses are women, who are paid minimum wages, in addition to decent food, and safe transportation facilities, this results in societal development, hence attracting Impact Investors. As we progress towards becoming a $10 trillion, InvITs would play an instrumental role in the country’s well-rounded development.
(This article is written by Krishnan S Iyer, CEO, NDR InvIT Managers)