FY23 budget must facilitate infrafinancing

A dedicated credit enhancement agency is imperative to enable more infrastructure bond financing

By Kumar V Pratap

Although we are seeing early signs of recovery (GDP growth rate for FY22 is forecast at 9.2%), this brings GDP back to about the same level as FY20 (given the rate negative GDP growth rate of 7.3% in FY21). It is well recognized that a sustainable recovery must be based on increased investment in infrastructure. The government has made efforts in this direction by increasing public spending, as private investment in infrastructure has still not recovered from the peak of the Eleventh Plan period (2007-2012), when it was 2.7% of GDP, which led to investments in infrastructure. around 7.2% of GDP during this period.

While it is true that some of the success of private participation in infrastructure during the Eleventh Plan period resulted in a disproportionate incidence of NPAs in the banking sector, bank financing continues to be the main source of financing by infrastructure borrowing. However, banks are not an optimal source of infrastructure financing given the asset-liability mismatch inherent in this type of financing. Since project finance is widely used in financing infrastructure projects, with its high leverage structure, there is a need to increase bond financing and institutional investments. infrastructure financing. These sources of infrastructure financing do not suffer from an asset-liability mismatch.

The typical credit rating for a project-financed infrastructure project is “BBB”, which does not qualify for investment by institutional investors as their investment threshold is typically “A” and above. Thus, a credit enhancement is required for the bonds issued by the entity in order to allow their subscription by institutional investors. For this, a dedicated credit enhancement agency is imperative to enable more infrastructure bond financing.

Such an entity was mentioned earlier and must be set up for more infrastructure bond financing. Added to this is the need for a new credit rating system for infrastructure projects. The typical credit rating metric followed by financial institutions is based on the Probability of Default (PD) under which a one-day, one-rupee default renders the project delinquent. However, since infrastructure projects have the comfort of a signed concession agreement between the public entity and the private sector, credit rating agencies in India have devised an Expected Loss (EL) scale, which is the probability of default multiplied by the loss given default (LD).

LD was found to be weak for infrastructure projects, which gives these projects a better EL rating. Although the Pension Funds Regulatory and Development Authority (PFRDA) and the Insurance Regulatory and Development Authority (IRDA) have adopted some aspects of the EL scale, there are reservations about its adoption for the banking sector given the need for compatibility with the Basel standards. More widespread adoption of the expected loss scale in the credit rating of infrastructure projects would increase infrastructure financing.

Monetization of brownfield assets through Toll-Operate-Transfer (TOT) and Infrastructure Investment Trust (InvIT) models has come of age in India, especially in the latter, due to the compelling case for risk. reduced in operating assets compared to assets under construction. As such, brownfield infrastructure assets become suitable for investment by institutional investors, which produce stable long-term returns with low correlation to economic cycles.

While the Center encourages these transactions at the state level by supplementing their total realizations to the tune of 33%, given the fundamental nature of these assets and the gain in efficiency of the assets of these transactions which would impact the overall competitiveness of the Indian economy, Union government entities taking this route may be allowed to retain at least 50% of the proceeds of asset monetization, without being adjusted against the gross budget support that the Center grants to these monetization entities.

Finally, reasonable user charges can be imposed on public services. For example, user charges in social infrastructure such as public health, education and water supply, and economic infrastructure such as electricity, metro and passenger trains are so low that they don’t even cover operating costs. In the National Infrastructure Pipeline (NIP) financing scheme, reasonable user fees will result in increased internal accrued liabilities and retained earnings of companies, both public and private. NIP has only budgeted 1-3% (about Rs 1-3 lakh crore) from this source, which can be much more with reasonable usage fees.

This is easily seen through an analysis of the energy distribution sector. There is a revenue gap of Rs 0.72 per unit of electricity consumed in the country (Power Finance Corporation, 2020). The total energy generated in the country in 2018-19 was 1,547 billion units (Economic Survey 2019-20), of which about 22% is lost in overall technical and commercial losses.

Thus, if cost-recovery tariffs are imposed in the electricity sector (through a policy directive to electricity regulatory commissions emanating from the budget announcement), the generation of additional potential revenue is in the range of Rs 86,900 crore per annum. Since the NIP is a six-year infrastructure plan of the country, the total resource generation potential by making electricity tariffs cost reflective is Rs 5,21,400 crore, which is much higher than that estimated in the NIP financing plan, and that too from just one major infrastructure sector.

SPrincipal Economic Adviser, GoI, and former Joint Secretary (Infrastructure Policy and Finance), Department of Economic Affairs, Ministry of Finance

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