Massive spending commitment for infra; new DFI on the cards

Institution to have ~20,000-cr initial capital; ~5-trn lending portfolio target in 3 yrs

The creation of a development finance institution (DFI) will meet one of the major demands of the infrastructure sector. This will not be the first time such an institution will be created for meeting the long-term financing needs of the sector. Union Finance Minister Nirmala Sitharaman announced that a new law will be enacted to create the institution, which will be a provider, enabler, and catalyst for infrastructure financing.

Sitharaman said the government’s National Infrastructure Pipeline (NIP) — that lays specific targets — will require a major increase in funding, both from the government and the financial sector. She planned to tackle this by creating institutional structures, monetising assets, and by enhancing the share of capital expenditure in central and state budgets.

To begin with, ~20,000 crore has been provided this year to capitalise the proposed DFI, even though the minister said the plan was to have a lending portfolio of at least ~5 trillion for the DFI in three years. To further plug holes in debt financing of infrastructure investment trusts (Invits) and real estate investment trusts (REITS) by foreign portfolio investors, the government plans to make amendments to the relevant legislation. This will further ease access of finance to Invits and REITS, thus, augmenting funds for infrastructure and real estate sectors.

The United Progressive Alliance government had in 2006 created the India Infrastructure Finance Company as a wholly-owned government company to meet similar needs of long-term financing. It was, however, created initially as part of the Scheme for Financing Viable Infrastructure Projects. It is not clear how different the new institution will be and whether it will be entirely owned by the government.

Though the DFI will help in infusing liquidity into the hands of infrastructure players, its own fund-raising ability will be guided by what kind of investment it is able to attract. According to Abhaya K Agarwal, partner-strategy and transaction, infrastructure and government and public sector, EY India, setting up a professionally managed DFI will be critical to the speedy launch of the National Asset Monetisation Pipeline and to fund new infrastructure projects, for which the government has allocated ~20,000 crore in this Budget.

The success of DFI in extending long-tenure debt financing at reasonable rates will be determined by a number of factors, said Arindam Guha, partner, leader-government and public services, Deloitte India. The factors include how effectively the capital contribution of the government is leveraged to mobilise extra-budgetary resources from other long-term investors like pension funds, sovereign wealth funds, development partners as well as international capital markets.

“A lot will also depend on how the proposed DFI is structured to meet the needs of specific sectors, like urban infrastructure, health, etc, where projects are primarily expected at the state and even local government level and mechanisms for partnering state governments through which they can contribute to the financial corpus of the institution and also leverage the technical expertise and financial resources of the DFI,” said Guha.

Deepto Roy, partner, Shardul Amarchand Mangaldas & Co, too, believes that while a DFI is the need of the hour for the infrastructure sector since the sector needs a long-term source of funds and banks have a significant liquidity issue, there is a concern around the source of the fund. “Unless the DFI has access to cheap international source of funds, it may meet the fate of previous attempts at securing institutional long-term funds in the past,” said Roy.

Overall, Aggarwal said the Budget will give significant boost to infrastructure — from reforms to ease of foreign investment, particularly participation of pension funds in the infrastructure sector, such as issuance of zero-coupon bonds and relaxation regarding commercial activities.

The government has allocated ~5.54 trillion for capital creation in the infrastructure sector, which is expected to increase project awards and creation.