By Shivam Bajaj
The answer to the success of the National Infrastructure Pipeline (NIP) lies with institutional investors backing projects at the development stage of their life cycle, while domestic retail investors participate in the secondary market for operational and revenue-generating assets.
At the heart of the government’s plans to make India a $5 trillion economy is the timely completion of 9,364 projects valued at around $1.9 trillion, aligned under the 2019 NIP- 25. In particular, the success of India’s manufacturing sector and its emphasis on ‘Making in India’ is directly influenced by the strength of India’s infrastructure backbone. However, the biggest challenge to implementing this pipeline could be the huge financing gap, which is estimated at more than 5% of gross domestic product (GDP). To bridge the gap in infrastructure development, access to the huge pool of global institutional capital for projects under construction is essential.
ALSO READ: RBI MPC expected to hike repo rate by 50bps to rein in inflation; could pause rate hike after December monetary policy
To its credit, the government has left the field open to the private sector to seize this unique opportunity and carry out these projects in mission mode. However, it stands to reason that domestic capital – both the public and private sector combined – may struggle to meet the funding requirement of this quantum. With an annual investment need of around 1,400 billion euros (BE 2022-23), it is likely that conventional sources of financing will face a shortfall in meeting this massive financing need. Neither the government with its borrowing program of over $14.31 trillion in the current fiscal year, nor domestic institutional investors can meet such a massive demand for funding, to finance the infrastructure pipeline, leaving behind a huge funding gap of 5% of GDP.
The government’s hands are tied as it is already moving away from its fiscal slippage path, risking a slippage in sovereign ratings. On the other hand, a handful of domestic financial institutions that fund long-term projects might not have the capital to meet the financing needs needed to complete those projects. So, one way forward to solve this funding puzzle could be to tap into the huge funding pool of global endowments, sovereign wealth funds, pension funds, insurance funds, etc., which remain abundant globally despite the pivot of major central banks. towards a normalization of policies and repeated hikes in interest rates.
Read also: Lack of security on the internet because of bots, algorithms: Rajeev Chandrasekhar
Interestingly, there are silver linings. First, infrastructure projects in India are a perfect fit with the investment thesis of global institutional investors, given their stable long-term revenue models and reduced volatility. Second, foreign investors such as infra-targeted funds, insurance companies and pension funds, who are looking for opportunities to invest in long-term assets, have shown strong interest in investing in these assets. This is evident in the success of real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). Hence, a strong pipeline of viable infrastructure projects will indeed drive them to double the growth of infrastructure developments in India.
Even though pension funds and sovereign wealth funds are already investing in India, they are investing in completed projects and already operational assets that generate income. However, to unlock the maximum potential that can be derived from foreign capital, the focus should be on deploying these funds into development-stage projects. With a significant improvement in the concessional framework, if developers package projects in a way that mitigates risk to capital providers, projects under construction could strongly attract foreign investors. Additionally, as secondary market opportunities for stable and operational projects are limited, international investors should seek participation early in the life of the project, to secure long-term revenue-generating projects for their portfolio. Retail investors, family offices and high net worth individuals (HNIs) can invest in low-leverage operational assets; these assets could give investors the opportunity to earn higher returns without taking on additional risk. Therefore, this path can turn out to be a win-win solution for all: accelerated infrastructure development for the economy, long-term investment rewards for global investors, and risk mitigation in the investment portfolio of global investors. detail in our country.
India can turn its infrastructure story upside down if developers are able to undertake successful financial engineering and structure attractive financial instruments for institutional investors. If this is achieved, the NIP can be considered “mission accomplished” and the country will undoubtedly move closer to the $5 trillion mark.
The writer is the founder and CEO of Avener Capital
