About $ 134 billion is expected to be invested in the infrastructure sector on small-to-mega projects across India in the next few years. While there has been a significant growth in capex, there is a need to develop sustainable and resilient infrastructure. The interim budget for 2024-25 announced in February 2024 has signalled India’s continued commitment to build infrastructure. About $ 134 billion will be invested in the infrastructure sector with small-to-mega projects being planned across the country. With infrastructure development becoming a key driver of economic progress, project financing will have to play as a vital tool for turning ambitious visions into reality. Project finance in India has traditionally been associated with core sectors such as roads, railways, power projects, ports and airports. While these sectors continue to dominate, the increased government focus on urban development and associated infrastructure has seen several transactions in the space of mass transit, clean energy, and health and sanitation. Rising urbanisation By 2030, around 42 per cent of population would be urbanised. Thus, increasing urbanisation supported by various government initiatives - such as National Infrastructure Pipeline (NIP), National Monetisation Pipeline (NMP), infrastructure investment trusts (InvITs), and Viability Gap Funding (VGF) among others - are driving infrastructure capital expenditure (capex). India's infrastructure investment has multiplier effect (of 2.5X) on GDP growth rate. The government in the recent years have consistently increased their spending on infrastructure development in the country. “FY17-FY23 infra spending was Rs.46.44 trillion, which is expected to increase to `53 trillion, with major drivers being roads, power and railways. While the average spending per year during FY17-FY23 was Rs.7 trillion, it will nearly double to Rs.13 trillion per year during FY24-FY27,” said Maulesh Desai, Director, CareEdge Ratings. Some of the key drivers for capex are: In road, factors like well acceptance of Hybrid Annuity Mode (HAM), monthly payments, improved asset monetization and healthy budget allocations have increased the speed of road construction. Investments are taking place in green field airports (such as Navi Mumbai, Noida, Bhogapuram, etc) and to expand the existing airports. In power sector, while the Government of India (GoI) is targeting 500 GW renewable target by 2030, revamped distribution sector scheme (RDSS) has reduced aggregate technical & commercial (AT&C) losses. Investment in green hydrogen, driven by the government’s push, is likely to grow very fast. Increased internet usage, rapid digitalisation, AI, and cost competencies in India are expected to drive investment in data centers. For railways, GoI has been increasing spending on electrification of track, bullet train, station redevelopment, dedicated freight corridors, Vande Bharat trains, etc. Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme and smart city development are propelling the development of urban transportation. Pathway to investment Roads and power account for a large share in the infrastructure spending and are expected to drive the capex in the future as well. Union and state governments contribute majorly to the investment in road development. “Going forward, we expect healthy capital outlay for roads, both from NHAI as well as from the state, which will be attributed by both higher land acquisition cost and also increase in pace of construction. Top 10 states contribute to 69 per cent of total capex,” stated Desai. As per CareEdge estimates, about Rs.13 trillion has been allocated for power during FY24-27 period with big focus on renewables and green hydrogen. GoI is targeting to achieve 500 GW non-fossil fuel target by 2030 driving investments in renewables. Renewable energy (RE) share to overall power capacity is expected to increase from 42 per cent in February 2024 to 50 per cent by 2030. The government is also investing to strengthen infrastructure to integrate additional amount of renewable energy generated into the transmission and distribution line. So, how will these investments be financed? Government will account for about 53 per cent share in total capex with around `28 trillion. Asset monetisation (mainly the roads and renewables) would drive around Rs.8 trillion and the rest Rs.17 trillion is expected from the private sector largely in the form of debt. Increasing private participation in infra projects According to Anjan Kumar Sarma, Consultant (Project Development), India Resident Mission, Asian Development Bank (ADB), government of India has taken various measures to encourage private sector participation (including Public-Private-Participation or PPP) in infrastructure projects. “NIP has identified `1 trillion investments in physical (93 per cent), digital (3 per cent) and social infrastructure (4 per cent) during the period of 2020 to 2025 out of which 21 per cent of the investment is expected to come from private sector. Most of the states in India have already adopted state specific PPP policy and guidelines to attract private investment in physical and social infrastructure and to create empowered approval mechanism,” he added. Rs.50 billion is expected to be spent in central missions like AMRUT, Mass Rapid Transit System, Smart Cities, Affordable Housing, Jal Jeeevan Mission, Swachh Bharat Mission, etc, where private sector to play key role. Though India plans to invest a lot in segments like public transport, housing, roads, etc, in terms of the basic infrastructure (such as sewage or solid waste management, water, etc) we still have to go a long way. Under Smart City programme, there was a plan to develop 100 cities. But, the number of projects, which have actually taken shape, is lower as many states could not perform due to lack of vision and understanding of project structuring. Global FIs in private sector Often, the government approach multilateral financial institutions (FIs) like International Finance Corporation (IFC), ADB, World Bank, etc to fund public projects which are relevant for social and economic development. But, these organisations also provide financial assistance for private projects. “ADB provides public sector financing as well as financial assistance to private sector. The Private Sector Operations Department (PSOD) of the Asian Development Bank facilitates finance to private and state-owned companies across diverse industries in developing Asia and the Pacific that promote sustainable and inclusive economic growth,” informed Sarma. As per the operational strategy 2030, ADB, for private sector financing, is focusing on areas like agribusiness, business development, energy, environmental infrastructure, finance, health & education, information and communication technology, trade, transport, water & urban development, etc. “In 2022, ADB has committed to 37 private sector projects. In India, ADB's private sector operations department has committed $ 208 million in private sector projects,” informed Sarma. For example, VA Tech Wabag Ltd, a leading player in India's water, is set to develop new wastewater treatment plants with ADB debt assistance of $ 24 million. The project is the first by PSOD in the water sector in South Asia. Speaking about the challenges in securing global FIs to invest in private sector, Sarma said, Most of the global institutes (while financing projects) look at social, environment and safeguard aspects very seriously. So mitigating that in private sector projects is a challenge. On the other hand, securing finance for public sector projects is relative easy as you have the backing of the government to mitigate issues related to social and environment.” Focus on sustainability for de-risking In infrastructure projects, cash flow visibility is the paramount for the successful completion and operation. Often various risks - such as sponsor risk, financial risk, regulatory risk, revenue risk, project risk and operations & maintenance (O&M) risk - are associated with infrastructure projects, especially the under construction projects. “Sponsor, regulatory and financial risks are common across the sub-sectors in infrastructure, while project, revenue and O&M risks depend on project complexity and contractual agreement,” stated Desai. With infrastructure development gathering steam, sustainability is also gaining prominence. “Capex requirement is very large, but there is also a need to develop sustainable and resilient infrastructure. Government of India has taken various initiatives leading to sustainability. For example, the government has announced dedicated freight corridors (DFCs). While Eastern DFC is completely commissioned, Western DFC is partially commissioned. Because of these DFCs travelling time has drastically come down reducing carbon emission. Similarly, because of good quality the roads and highways, which allows transport of heavy vehicles, the country was able to reduce 32 million tonne (mn t) of carbon dioxide emissions (as per the government data) in the last ten years,” observed Desai. Similarly, by using renewable energy in ports, railways and data centre, the country can reduce carbon footprint. The use of renewables (like bamboo) and recycled materials for road construction, and better sewage system can lead to sustainability. “Sustainable infrastructure not only provides economic growth and employment opportunity, but also offers resilient infrastructure and improve the cost efficiency of the project,” Desai explained. In India, capex is not a major issue, but the stakeholders need to be sensible about O&M cost because sometimes the higher O&M cost, increases the life cycle cost of the project. Thus, resilient infrastructure lowers life cycle cost of the projects. Desai added, “Eco-friendly infrastructure can provide the opportunity for the sustainable financing. It can also attract environmental, social, and governance (ESG) funds, the share of which is expected to increase to 22.5 per cent of total global asset under management (AUM) over the next five years.” (This article is based on the webinar - titled “Project Financing: Challenges & Opportunities” - organised by FIRST Construction Council on April 11, 2024) “Sustainable infrastructure not only provides economic growth and employment opportunity, but also offers resilient infrastructure and improve the cost efficiency of the project.” - Maulesh Desai, Director, CareEdge Ratings “NIP has identifiedRs.1 trillion investments in physical (93 per cent), digital (3 per cent) and social infrastructure (4 per cent) during the period of 2020 to 2025 out of which 21 per cent of the investment is expected to come from private sector.” - Anjan Kumar Sarma, Consultant (Project Development), India Resident Mission, Asian Development Bank (ADB)