Infra trust fund on its way

Under the finance ministry’s new announcement, the revenues of a project will be transferred to the trust, which will then issue units to investors. Shilpi Aggarwal says the government is seeking innovative financing solutions for infrastructure.

Despite the rapid growth in bank credit in the past couple of years, India’s infrastructure sector has been facing tough times witnessing a slowdown in capital infusion. Owing to the asset-liability mismatch and reaching exposure limits, financial institutions are becoming increasingly wary of further doling out money to the sector.

The infrastructure sectors have been facing a tough time witnessing a slowdown in capital infusion. Owing to the asset-liability mismatch (ALM) and exposure limit breaches, financial institutions are becoming increasingly wary of further doling out money to the sector.

As major infrastructure development is in a dire need of a substantial influx of investment capital, the government is taking a serious note of the situation and is planning to create a new Infrastructure Trust Fund (ITF), Arvind Mayaram, Secretary, Department of Economic Affairs (DoEA), Ministry of Finance announced.

Addressing the 3rd International Summit on Infrastructure Finance organised by ASSOCHAM on 20 September in New Delhi, Mayaram said the structure of the new ITF will be finalised in next two months. "Under the new structure, the underlying revenue of a project will be transferred to a trust and the trust will issue units to investors, including private and foreign investors." The new structure is popular in countries like Singapore, Hong Kong and the US.

"We are also looking into requests coming from the industry on setting up dedicated infrastructure banks which will exclusively cater to the financial requirements of the infrastructure projects," said Union Minister for Road, Transport and Highways, Oscar Fernandes in his address at the conference.

Attended by leaders of the infrastructure industry and some top-rung banks and financial institutions, the event focussed on the viability of the public-private partnership (PPP) model in infrastructure sector, challenges faced in securing finance by private players, financing options available to them and a debate on how to make the available options a win-win for borrowers as well as lenders.

Mayaram maintained that there is an undeniable and unarguable connection between infrastructure development and economic growth and cited a Mckinsey report that an increase in infrastructure investment equivalent to one per cent of GDP could translate into an additional 3.4 million direct and indirect jobs in India, 1.5 million in the US, 1.3 million in Brazil and 700,000 in Indonesia. Yet, studies show that the global economy is running an infrastructure deficit of anywhere from $40 trillion to $70 trillion. In India, 12th Five Year Plan lays emphasis on the development of infrastructure sector for sustaining high growth and ensuring inclusive growth. The total investment in the core infrastructure sector during the 12th Plan is estimated at approximately $1 trillion, of which $500 billion is expected to come from the private sector. A greater share from the private sector has been encapsulated considering the fact that the share of private participation in infrastructure investment has increased from 22 per cent in the 10th Five Year Plan to 38 per cent in the 11th Plan and is expected to be about 48 per cent during the 12th Plan.

BK Chaturvedi, Member, Planning Commission, stated, "$500 million has been spent so far." Chaturvedi admitted to the several challenges faced by private developers on account of environmental and regulatory clearances, and said that the government is working on resolving them. "Most of them are resolved, but process takes time because infrastructure projects are difficult projects."

Banking concerns

Initially, infrastructure funding was largely by budgetary allocations and the internal resources of PSEs which were engaged in infrastructure. However, there was a change during the 11th Five Year Plan, when the banks, NBFCs, and insurance companies involved themselves in funding infrastructure. The banks were able to respond to the rapidly rising demand for infrastructure companies by unwinding their excess investments in government securities maintained as SLR.

The rapid growth in bank credit to infrastructure has resulted in greater concentration of risks in banks. The asset-liability mismatch and reaching exposure limits is constraining further expansion of credit for infrastructure projects. The banks have prudential exposure caps for the infra sector lending as a whole as well as for the individual sector. In present circumstances, most of the banks have almost reached the prudential caps for certain sectors. Therefore banks are finding it difficult to infuse large funds for infrastructure lending in those sectors. Further the funding from the banking sector has one more limitation in the form of tenure of funding, i.e., banks or consortium of banks provide funding with a horizon of around 8-9 years (in very good projects may be up to 12 years), whereas infra projects require long term funding of generally 20-25 years horizon.

Voicing the concerns of banking community, Rajeev Mahajan, President, MD & Regional Business Head (North & East), Yes Bank, said, "Although India has a high savings market, we are still in need of long term financing (20 years or above) for infrastructure projects, due to a lack of depth in the fixed income markets. Savings need to be channelled for the development of the sector-one such platform would be a strong corporate debt market with long tenure investment opportunities."

Speaking in the similar vein, Harsh Kumar Bhanwala, Executive Director, India Infrastructure Finance Company (IIFCL), said, "A majority of the infrastructure companies also face paucity of sourcing equity finance. The government needs to take a new approach to restructuring the finances of infrastructure projects. Pension and insurance funds need to be channelled to infuse capital in this space."

Government at work

As the sector faces stress, Mayaram said, "A need has been felt to look at some of the policies de novo and also to look for more innovative ways to finance and structure the infra projects.

The innovative ways to finance infra projects, like PPP, offer many advantages in terms of leveraging public capital to attract private capital and undertake a larger number of infrastructure projects, introducing private sector expertise and cost reducing technologies to bring in efficiencies in operation and maintenance of quality public services."

He underlined the various innovative financial instruments used by the government to bring long-term funds to infra projects like Infrastructure Debt Funds (IDFs) and Tax Free Bonds.

IDF is expected to provide long term low-cost debt for infrastructure projects. The cost and tariff of infrastructure services are likely to go down as a result of low cost long term debt provided by IDFs. The taking over of existing bank debts by IDFs will release an equivalent volume for fresh lending by banks to infrastructure projects. Potential investors in IDF may include off-shore institutional investors (insurance funds, pension funds, sovereign wealth funds, etc). The income of IDFs has been exempted from income tax. Reduction in withholding tax has also been allowed on interest payment on borrowings of IDFs from existing 20 per cent to 5 per cent. These measures have made the investments in IDF-NBFCs are safe and risk-free investments with the scope for fairly high returns.

He also elaborated on tax-free bonds where the government has attempted to broaden the corporate bond market by according tax-free status to infrastructure bonds. The government has proposed to allow tax-free bonds amounting to Rs 50,000 crore during FY 2013, which can be issued with a minimum tenure of 10 years and maximum of 20 years. "The investors are allowed tax exemption for the interest earned on these bonds and listing on the stock exchanges for keeping the liquidity window opened," Mayaram mentioned in his address.

"The deficit in infrastructure sector is not peculiar to only the developing economies; the advanced economies are also facing the challenge of maintaining and upgrading the extensive infrastructure networks that have been created. It is estimated that the US alone would require at least $2 trillion to meet its infrastructure needs and the forecast investment needs for infrastructure improvements total upward of Euro 2 trillion across the continent."

While the government is promoting public PPP as an effective tool for bringing private sector efficiencies in creation of economic and social infrastructure assets, the World Bank has an opinion that the private sector participation is helpful only to a certain extent and cannot be treated as a panacea. Onno Ruhl, Country Director-India, World Bank, cited a World Bank Report on Private Participation in Infrastructure (PPI).

According to a report, India has been the top recipient of PPI activity since 2006 and has implemented 227 projects, 43 at the central level and 184 at the state level which attracted a total investment of $20.7 billion in 2011.