‘Funding of infra sector must get innovative with risk capital, enhanced credit guarantee’

With little flexibility for the government to step up funding for the infrastructure sector due to the high fiscal deficit of both the Centre and States, there is a need to consider innovative financing options, including backing the sector with risk capital, extending credit guarantee schemes, repurposing the existing funding modes, and creating a new Development Finance Institution.

Arindam Guha, Partner, Deloitte India, said the pandemic-induced lockdown has had a big impact on the country’s finances, leading to high fiscal deficit. This means there is very little flexibility for the governmentto enhance funding for the infrastructure sector.

In an exclusive interaction with BusinessLine, Guha said: “While existing fiscal constraints may limit the government’s investments to around 20 per cent of the NIP outlay of ₹111-lakh crore, it is important that this investment is targeted at areas that can act as catalysts for the State government, as well as private, long-term investors. It is from this perspective that setting up or repurposing existing DFIs, enhancing credit guarantee facilities and augmenting asset monetisation options like InvITs could act as force multipliers. Conscious focus is needed on sectors such as urban infrastructure, irrigation, health and education, where State governments are likely to be primary project promoters, as these sectors account for around 30 per cent of the NIP.”

He explained that during FY21, budgetary spending on infrastructure development is expected to be around ₹4.5-lakh crore as per government data shared in October 2020. Even if this increases by 10 per cent y-o-y over the next four years, the total budgetary spend during FY25 is likely to be 18-20 per cent of the total National Infrastructure Pipeline (NIP) outlay of ₹111-lakh crore. As per Volume 2 of the NIP, another 25-26 per cent is to be funded through State Budgetary outlays. Hence, at least 50 per cent is to be funded through extra-budgetary resources, including private investment.

However, the finances of States have always been constrained, and have been further hit by lower tax revenues as well as higher Covid-19-related outlays. Moreover, total annual infrastructure spend has always been at most ₹9-lakh crore to ₹10-lakh crore even during 2018 and 2019. Hence, a change is required to achieve NIP levels of ₹111-crore during FY25, translating to around ₹20-lakh crore per annum.

With Central government budgetary outlay being at most ₹5-lakh crore per annum, it needs to be made in areas that can incentivise both State government budgetary spend and extra-budgetary investment, including from the private sector.

“Setting up a new Development Finance Institution/s (DFIs) or repurposing existing ones to provide long tenure financing at a reasonable rate. The initial capital from the DFI would have to come from the Budget and can be further leveraged to mobilise resources from development organisations such as World Bank, ADB and even international capital markets. Possibly, an institution like Hudco could provide innovative modes of funding. Or one may even consider an ICICI-like institution of the earlier times. While ₹15,000-crore equity was announced in the last Budget under IIFCL, this needs to be enhanced.

The other important aspect is the need to quickly monetise assets, particularly roads, where the NHAI could play a significant role. The monetisation will help churn the assets and provide funding for new projects.

One could look at enhancing credit guarantee limits for infra projects to enable the large corpus of domestic pension fund and insurance companies to increase investment in infra bonds and other instruments while keeping existing credit rating guidelines in mind.

The existing guidelines do not allow pension and insurance funds the flexibility of funding infra projects. We need to tweak norms to make this possible, he explained.

Extending asset monetisation options such as infrastructure investment trusts to additional sectors (currently, there are existing Infra Investment Trusts primarily in power and roads sector) like urban infra and with focus on state level infra projects. This would enable State Governments to monetise completed or operating infrastructure projects / assets and re-invest in new infra projects.