This has helped in accelerating the execution of PPP infrastructure projects in India.
The main hindrance was because of the inability of the banks to sanction loans
to the private players due to the high asset liability mismatch. For a mammoth
infrastructure project, a huge loan requested by a private party required a
huge collateral of some form or other that needs to be produced to the bank as
a guarantee. This was often a challenge. Through IDF which issues bonds, credit
enhancement which is an attribute of the PPP projects is present. This lowers
the credit risk significantly and leads to a higher credit rating. If the IDF
issues units then the credit risk will be borne by the investors participating
in the IDF. Consequentially, the investors can also seek higher returns owing
to the risk borne by them.
other benefit of IDF is its refinancing strategy.
This essentially means an IDF taking over the debt issued by a commercial bank
on an ongoing project. By taking over huge volumes of banks loans, IDFs are
essentially opening up similar volumes of capital with banks for fresh lending
to other new infrastructure projects. This further accelerates the
infrastructure growth of the nation.
Analysis in Indian
and Global Context
financing of infrastructure projects is a fairly new phenomenon in India. The
regulations for the same were rolled out SEBI and RBI in late 2011 and the
first such IDF was formed by a contingent of banks under an MoU. The effects of
the IDF on Indian infrastructure growth needs to be analyzed post 2012-2013.
FDI inflows on the construction (infrastructure)
sector alone on the year 2012-13 were $283.89 million. Over the years, this
number has risen exponentially to reach $4.57 billion in 2015-16. This is an
increase of 15 times in a span of just 4 years. Thus, it can be concluded that
the commencement of the IDF as a vehicle for financing infrastructure projects
has certainly led to the increase in foreign direct investment in the sector.
This has led to the launch of more and more projects by the project authorities
like NHAI, Shipping and others and the influx of FDI is only expected to rise
in the coming years. Also, speaking in terms of proportion, the share of
Infrastructure sector in FDI was only a meager 1.2% in 2012-13. Compared to
this, in the year 2015-16 it was a stellar 11.2% of the total FDI. This shows
that infrastructure has become a lucrative sector for investment in India and
more and more players are investing in infrastructure. Apart from this, the national clean energy and environment fund
is another infrastructure fund to finance innovation and development projects
on clean energy. The government of India has been raising this fund through a
cess on the production of coal in India. The funds collected are being used for
green projects across the country and improve the level of research and
development in the renewable energy sector.
In terms of the global context, Infrastructure debt funds are a better
alternative to government bonds which provide relatively lower returns. But,
the success of IDFs heavily depends upon the growth prospects of infrastructure
projects across the world. This
has put tremendous pressure upon the IDFs to perform and provide healthy
returns to their investors. Despite this companies in the US have been
overshooting their IDF targets and raising huge amounts of money. Investors
have shown interest in these funds in the simultaneous presence of pension and
insurance funds. Constrained financing
from public funds has provided a huge opportunity for private investors to
indirectly invest in huge public infrastructure projects across the world.
However, there is a long way to go and it is very important that there is a
constant reform in the regulatory frameworks and risk assessment pertaining to
these funds across the globe.
IDFs are vital components to act as a source of long term financing of infrastructure projects in India. Equity
infusion by government & private investors has to be complemented by IDFs through NBFC and Mutual Fund structures
IDFs have acted as a tool for attracting significant FDI in
infrastructure projects in India. The government should continue with its
reforms on the ease of doing business and assessment of the regulatory
frameworks so as to incentivize FDI through this route
IDFs are vital to plug the infrastructure
financing gap for all the developing economies across the world. There is a
limitation of the governments to raise debt and widen the fiscal deficit for
financing infrastructure projects. IDFs can act a substitute in order to fund
this shortage of funds for nation building activities
Infrastructure project credit ratings should be improved so as to
attract the investors to put their money in infrastructure debt funds. Reducing the risk and increasing the
rate of return on the investment would motivate investment in this area
Infrastructure sector risks including land acquisition laws, environmental clearances can stall projects
which may increase the risk rating of the funds. These legislative reforms have
to be addressed in order to increase the project viability and hence the
quality of infrastructure debt funds
Global factors including market slowdown, liberalization, government
policies, are some of the areas of concern which can affect the growth of IDF.
These factors should be taken into consideration while incorporating and
launching these funds