Infrastructure Financing: Opportunities and Challenges

Following our motto of revolutionizing the debt market through technology and innovation, we conducted a webinar on “Discovering the opportunities and challenges in Infrastructure financing” with leaders from Aseem Infra Finance.

We focussed on key points to promote financial literacy and awareness in the economy.

1. Trends in Infrastructure Financing

The infrastructure finance market has shown decent growth over the years and continues to expand significantly.

The infrastructure finance sector grew at a CAGR of 8.3% over the past six years, adding Rs 10 lakh crore, taking the tally to Rs 25 lakh crores.

• Banks on defense
  Mr. Shubham Jain, Senior Vice President and Head Infrastructure and Real Estate at Yubi, explains how the infrastructure finance companies are the flag bearers of this growth and have posted a CAGR of 14.87% in the last 6 years. However, banks continue to play safe and are not willing to go all guns blazing in the sector.Banks cannot be blamed for negligence for their muted performance because a range of factors stopped them in their tracks. Such factors include banks under the PCA regime, mergers of smaller banks, NPA issues, and the banks’ recovery period. In fact, the banks have moved in the downward trajectory as they ended up having 10.03% infrastructure credit as a proportion of total non-food credit in 2021, while the figure stood at 15.4% in 2021.
• The power sector continues to lead the pack
  The road sector is leading the infrastructure finance market, which has been overwhelmed since the launch of HAM projects in 2016. The power sector accounts for 58% of infrastructure finance credit in 2021 after a slight dip from its 2015 level of 64%.
  Transport & distribution sector is the fastest-growing sector and has a share of around 12% in the infrastructure finance credit market. Among other sectors, the airport sector is one of the major leaders werewere significant traction is see
• Infrastructure finance companies (IFC) are leading the charge
  The line of credit held by IFCs has shown a sharp rise as it grew from 37% in 2015 to 54% in 2021. This strong push from IFCs, which enabled them to capture a greater percentage of the infrastructure credit than commercial banks, was largely due to a generous participation from public IFCs and, most importantly, sluggish participation from banks themselves.The government’s liquidity packages in favor of IFCs like RECs and PFCs aided significantly in the growth of public IFCs. Moreover, a spree of railway projects came like a blessing for the stalwart IRFCs, which helped it expand drastically. Meanwhile, Government schemes like UDAY worked against the banks in FY17 and FY18 by converting the exposure in loans to bonds.Public IFCs are growing steadily; however, private IFCs are failing to participate, and their contribution is at a meager 5%.

2. Opportunities: National Infrastructure Pipeline

Prime Minister Narendra Modi’s speech on India’s 75th Independence Day was the first time we heard of NIP. In its initial draft of 2019, a total outlay of Rs 111 lakh crores was planned. The final report of 2020 covered all the projects greater than Rs 100 crores across the 7 segments.
As per the latest information available, the size of NIP has grown to Rs 145 crores.
Of the seven segments included in NIP, transportation has the largest share in terms of projects. The transportation sector has 4,582 projects with an outlay of Rs 58.59 lakh crores, followed by the energy sector with 685 projects and an outlay of Rs 35.81 lakh crores.

Though NIP looks promising for the future, the road for it to implement its plans is quite challenging. For a country spending nearly Rs 10 lakh crore on capital investment in infrastructure at present to expand it to the planned levels of Rs 145 lakh crores in the next 6-7 financial years is quite an uphill task.

The majority contribution of the funding from the Government sector, despite high fiscal deficits and muted participation from the private sector, is not really helping the cause.

• Slow project implementation
  The project implementation rate is low. Only 5% of the planned projects are actually implemented. Of the 9,047 projects that were planned, only 447 were successfully implemented. While another 4,695 projects are under process. In monetary terms, a fair chunk of the proposed money is yet to be spent; an estimated Rs 121 lakh crores constituting nearly 83% of the planned amount, is yet to be spent on the projects.
• Largest sub-segment of NIP: roads and bridges
  India is a developing nation and needs to lay roads for infrastructure expansion. Accordingly, 3,477 projects of various state and national highways with an outlay of Rs 30.42 lakh crore are planned. The Hybrid Annuity Model (HAM) is gaining a lot of traction, and we have already seen 50% of the projects allotted on this model.
  After roads and bridges, renewable energy is the sector that bagged the second-highest number of projects, with 253 projects having a total outlay of Rs 16.42 crores.

3. Major challenges

• Significant time and cost overruns
  Time and cost overruns which have always been a part of infrastructure space is the main reason for investors to stay away from it.The Ministry of Statistics and Program Implementation closely tracked 1,670 projects that had an aggregate outlay of Rs 25.97 lakh crores, and their observations raised quite a few red flags.
  More than half of the projects are running with an average delay of 25-40 months while 568 projects are experiencing a cost overrun of 19.9% as of October 2021.Various reasons for such massive delays and cost overruns include delays in land acquisitions, delays in project clearances, Covid pandemic, financial closures, geographical challenges, changes in approach, encroachment, manpower shortage, etc. Cost overruns and delays pose a tough challenge for the lenders too, and in extreme cases, even some lenders have to add up their NPA accounts too.
• High variation in cost and revenue estimation
  Since these projects run for years and no one knows how things are going to phase out in the future, it’s extremely tough to estimate the cost to be incurred and expected revenues.
  The absence of scientific tools, robust cost projection techniques, changes in technology with time, diminishing utility just adds up to the woes. Moreover, unanticipated projects like competition from another project in the vicinity and issues like proper management of escrow accounts also make it difficult to estimate the cost for a long-term project.
• NPA challenge
  On the one hand, we welcome the sharp fall in the contribution of infrastructure in overall NPA from 50% in 2016 to 34% in 2021, while on the other hand, it’s hard to digest that it’s still one of the highest contributors to NPA across sectors. Nevertheless, the decline was majorly driven by regressive writing off of bad loans and stringent policies introduced by RBI.
  GNPA margin for the sector has also nearly halved from its peak of 22.80% that was registered in 2018.

3.Outlook for the sector

In true terms, the Government is doing everything to keep the infrastructure sector up and running. It has a long list of projects waiting to be allocated. 3,900 projects with an outlay of Rs 72 lakh crores currently await allocation. A prudent estimate of 20-25% of this number totals to lending opportunities worth Rs 18-20 lakh crores for different lenders.

State spending is expected to be on a high, and large states like Uttar Pradesh, Karnataka, Madhya Pradesh, Gujarat, and Tamil Nadu have a combined Capex spending of Rs 2.5-3 lakh crores annually.

Roads, airports, and transmission are the sectors that will lead from the front, given the projects planned for these sectors and those that are already in the pipeline will expand the scope for IFCs. The projects are likely to increase with the state and central Government announcing various new infrastructure projects in election-bound states.

Talking of the National Infrastructure Pipeline, we cannot skip Infrastructure Investment Trusts or InvITs, the emerging model that has already raised Rs 65,000 crore. InvIT’s are rated much higher, the reason being the pooling benefits and lower leverage

Conclusion
With government IFCs putting in the bulk of their resources to keep pace with the continuous flow of projects from the Government under the National Infrastructure Pipeline, the infrastructure finance segment is set for steady growth. The growth will be even more profound if banks and private IFCs start to show more enthusiasm; together, banks and IFCs have the potential to propel the current CAGR of 8.3% beyond 10% in the coming years.