Infrastructure Development and Finance,  Key to Economic Growth

Infrastructure Development and Finance, Key to Economic Growth

September 24, 2020 Admin
infrastructure development Finance economic growth project finance private equity NBFCs GDP Covid19

Infrastructure has been recognized as one of the most important enabler of economic growth. The significance of infrastructure creation has all the more increased in the current context of post covid19 scenario when we are experiencing a likely negative growth of GDP in the current financial year.  The infrastructure development has a multiplier effect on industries like steel, cement, construction material, coal, etc. With the medium-term goal of making India a US $5 trillion economy, the relevance of evolving and implementing new infrastructure projects is required to be a part of the Government plan and strategy, which now needs to be given a further boost.


The infrastructure broadly covers various activities, sectors, and sub-sectors as brought out under the HARMONISED MASTER LIST OF INFRASTRUCTURE SUB-SECTORS.  This list is finalized and approved by the department of economic affairs, ministry of finance, the government of India. As per the requirements of the developing economy, this list is revised and updated from time to time taking into account the significance of various activities in the contemporary scenario. Traditionally the infrastructure is consisting of five categories.

  1. Transport
  2. Energy
  3. Water and Sanitation
  4. Communication
  5. Social and commercial infrastructure.
Infrastructure Development and Finance,  Key to Economic Growth

The category of “transport” has been widened to make it “transport and logistics”. This now, inter alia, includes a multimodal Logistics Park with inland container deport, cold chain, warehousing facility, etc.


Similarly, the development of Railway stations and adjoining commercial infrastructure and Affordable Housing were added to the list in the recent past, recognizing their importance as thrust areas for the socio-economic development.


To push India up in global rankings in public infrastructure, the government has evolved a comprehensive strategy and has come out with National Infrastructure Pipeline (NIP), entailing a total investment of Rs 111 Lac Crore over the next five years.  The traditional creation and funding of infrastructure assets have been, by way of government funding under the conventional EPC mode- i.e. Projects are awarded and funded by the government (Center/state) under the Engineering Procurement and Construction model.


Given the gigantic amount of investment required and limited resources available with the government, the role of private developers in infrastructure development has evolved over a period of time. As a strategy, the government is attempting to provide a positive and enabling environment for significant private investment in infrastructure at all levels.


It is estimated that India would need to spend US dollar 4.5 trillion on infrastructure by 2030 to realize its vision. The national infrastructure pipeline has been proposed to achieve the same in an efficient manner that is RS 111 Lac Crore over the next 5 years. Out of the total amount of Rs. 111 Lac Crore, approximately 23.31 lac Crore (21%) is envisaged under the private sector besides 39% under the central government and 40% under state governments. The road sector has already seen a good number of successful projects under PPP (Public-Private Partnership) model, after some initial difficulties. NHAI has evolved new models like HAM (hybrid annuity model)  and TOT toll operate transfer) which are running successfully.


Similarly, in the Renewable Energy sector, a large number of projects in the private sector have been completed and running successfully. With technological improvements and emerging tariff structure (with SECI-NTPC bids), this sector is moving towards the targeted growth and commitments under the Paris Accord, emphasizing the renewal energy sector.


More opportunities are emerging for the private sector for Urban Infrastructure (solid waste management, affordable housing), besides the development of ports, airports, and railway station development, with new projects being announced.


Given the long term nature of infrastructure projects, long term patient capital (from insurance and pension funds) is ideally suited for meeting the requirements. But given the regulatory requirement and absence of a robust and deep bond market, private sector infrastructure projects have been so far largely funded by commercial banks and NBFCs.


The outstanding bank credit in the infrastructure sector reached Rs 80.3 Lac Crore in 2019 which amounted to 12% of total non-food credit. The major sectors funded are power, roads, and telecommunications. In addition, there are specialized NBFCs like REC/PFC/IREDA catering to specific sectors. New avenues of funding like IDFs (infrastructure debt funds) and INVITS are emerging to bring in additional funds particularly for, running/completed projects to partly pay off existing debt.


However, for new Greenfield projects, during the construction period, commercial banks and NBFCs shall continue to play an important role. With the proposed investment in infra and funding pattern envisaging 23% to 27%  of debt from banks and NBFCs, there is a big opportunity for lenders and developers to contribute towards the national goal of infrastructure assets creation over the next 5 years.


Resurgent India as a leading organization with ample expertise in project finance has a significant role to play in identifying the eligible projects, formulating Detailed Project Reports, providing Techno-Economic Viability Reports, providing monitoring services as Agency for Specialized Monitoring, Project Management Services, and arranging the requisite debt and private equity on most competitive terms, to create a win-win situation for all the stakeholders.

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