Vinod Giri, Managing Partner – Direct Investments, National Investment and Infrastructure Fund (NIIF) takes a look at the evolution of the Indian infrastructure investment environment, outlining key government policies that have created opportunities for investors in this article written for GIIA.
The Indian infrastructure sector has significantly evolved over the last two and a half decades. Though building infrastructure has been at the heart of economic priority, infrastructure development started taking centerstage of economic policy focus over the last decade. Large programs to build national highways, strengthen rail and urban infrastructure, airports etc. were initiated around late 1990’s. These projects were largely driven and executed by the Government of India (GoI) with the objective to fuel expansion in the sector and lay grounds for a developed India.
As India’s economy grew and the criticality of a structured approach to build infrastructure in the country was realized, Public Private Partnerships (PPPs) led infrastructure development gathered momentum with support from Government policies and frameworks. During this time, private sector players entered the market and several large-scale projects were funded by investors comprising of domestic EPC contractors who had access to capital by leveraging operating and holding companies and PE investments. However, they lacked experience on managing risks associated with long-term PPP concessions. Other factors such as delays in land acquisition, statutory approvals and lack of robust governance frameworks further widened the gap and created turbulence in the sector leaving a handful of projects that were commercially viable.
Some of the key initiatives implemented over the last few years in the Indian Infrastructure sector include:
a) Re-allocating the project risks to private sector: One of the major challenges for the Government was to bring the interest of private players back in the sector. The Government overcame this challenge by changing the focus of PPPs from structures that allocated bulk of project related risks to the private sector such as BOT (Build-Operate-Transfer) to relatively de-risked and safer project structures such as HAM (Hybrid Annuity Model), thus enabling a low-risk environment with adequate payment security mechanisms for private investments besides injecting the much-needed liquidity in the infrastructure sector.
b) Insolvency and Bankruptcy Code: The Insolvency and Bankruptcy Code (IBC) was enacted to expedite resolution of Non-Performing Assets (NPAs) in the banking sector (some portion of which was on account of exposure to stressed infrastructure assets developed over the past decade). This measure provided a robust mechanism, backed by legislation, and has helped reduce the stress levels in banks while gradually bringing back their appetite for fresh lending. Initiatives taken by the Government at a project and policy level to revive the sector, monetization of projects which were already operational aided in bringing strategic infrastructure opportunities back in the market. However, it is still early days of implementation and the effects of these decisions coming to fruition are yet to be experienced.
c) Creating opportunities to attract large global institutional investors such as SWFs (Sovereign Wealth Funds), Pension Funds, Insurance Funds etc.: The Government has started to identify monetization and privatization/strategic disinvestment opportunities for large operational public assets in the infrastructure sector. Initiatives such as ToT (Toll-operate-Transfer) structures on Highways and Roads and airports privatization by AAI (Airports Authority of India) are garnering strong traction from the global investor community owing to a long-term perspective in asset classes which have predictable and well-established cash flows. For Greenfield projects, the Government is developing stable long-term frameworks such as the bidding framework for development of utility scale renewables projects and development of toll roads under HAM (Hybrid Annuity Model). Global Investors have indicated interest for such projects and investors such as Sovereign Wealth Funds, Global Pension Funds, Insurance Funds, Infrastructure Funds etc. are well-suited for these investment avenues.
d) National Infrastructure Pipeline (NIP): The National Infrastructure Pipeline (NIP) was launched recently to outline a comprehensive vision for the infrastructure sector of the country. Projecting an investment opportunity of about USD 1.5 trillion till FY 2025, the NIP presents a list of investible greenfield and brownfield expansion projects to be executed annually till FY 2025 across infrastructure sectors. This includes core infrastructure segments such as Transport, Energy, etc. as well as social infrastructure including Healthcare, Education and emerging segments such as Renewables and Clean energy, E-Mobility etc. The NIP provides a clear and transparent long-term visibility to investors about pipeline of investible projects and will thus help them plan their strategies in advance.
e) Taxation and structuring reforms: Finally, the above measures have been complemented by taxation reforms (both direct and indirect taxes). In the direct tax space, Corporate tax rates were reduced to 22% and 15% for new companies investing in the manufacturing segment. Further, 100% tax exemptions have been granted to some class of investors for investments into the infrastructure sector. For indirect tax, a uniform and nation-wide Goods and Services Tax (GST) structure has been implemented. These taxation measures have positioned India as a competitive market in the world, particularly in terms of ease of paying taxes. The Indian Government also introduced regulations for setting up Infrastructure Investment Trusts (InvIT) in 2017. Both, listed and unlisted InvITs have been set up across roads and transmission sector. Renewables sector focussed InvITs are in the process of being set up. Government has been pro-actively engaging with the market participants to strengthen the InvIT framework.
f) Setting up National Investment and Infrastructure Fund (NIIF): NIIF was created with a vision to provide opportunities to those investors who prefer investing in the Indian market through a trusted partner. NIIF is structured as a collaborative investment platform, majorly owned by its investors and anchored by the Government of India. In the last three years, NIIF has been successful in creating robust governance systems and processes. Owing to the leadership team’s deep knowledge and understanding of the Indian Infrastructure sector and private equity market, the institution has been successful in attracting several reputed global investors such as OTPP (Ontario Teachers’ Pension Plan), AustralianSuper, ADIA (Abu Dhabi Investment Authority), Temasek, CPPIB (Canadian Pension Plan Investment Board), AIIB (Asian Infrastructure Investment Bank), ADB (Asian Development Bank) to name a few. Currently, NIIF manages over USD 4.3 billion of equity capital commitments across its three funds and is investing across asset classes with a clear focus to generate attractive risk-adjusted returns over a long-term horizon for its investors and shareholders.
The above measures have benefitted the Indian infrastructure ecosystem in a positive way. While COVID has added uncertainty to the broader investment environment, the Indian infrastructure market continues to offer a strong pipeline of investment opportunities for all classes of investors. From greenfield projects (as part of the NIP) to operating public assets (monetization/disinvestments), investors have a bouquet of opportunities to choose from, depending on their risk appetite. Additionally, trusted collaborative platforms like NIIF may also be considered by investors who prefer to work with local experienced teams to access investible opportunities in Indian infrastructure.