InvITs And Infrastructure Funding : Daily Current Affairs

Relevance: GS-3: Indian Economy, mobilization of resources, growth, development and employment.

Key Phrases: Infrastructure Investment Trusts, SEBI, RBI guidelines, REITs, National Infrastructure Pipeline, Social and Economic Infrastructure Projects, Public-Private-Partnerships, Private investors, Fiscal reforms.

Why in News?

  • Capital markets regulator SEBI came out with a new norm to implement draft filing fees to be paid by infrastructure investment trusts (InvITs) for initial offer and rights issue.

What are Infrastructure Investment Trusts?

  • Infrastructure Investment Trusts (InvITs) are investment instruments that work like mutual funds and are regulated by SEBI. Typically, such a vehicle is designed to pool money (small sums) from several investors to be invested in income-generating assets.
  • InvITs are mostly structured as trusts, and an independent trustee holds assets on behalf of unit holders. InvITs could be set up for sectors defined under the infrastructure as per RBI guidelines. So far, developers engaged in the road, power transmission, gas pipelines and tower transmission have formed InvIT.

How are InvITs different from REITs?

  • REITs and InvITs are conceptually like mutual funds, where a sponsor raises capital and invests it in infrastructure or real estate projects. While REITs comprise a portfolio of commercial real estates, a major portion is already leased out, InvITs comprise a portfolio of infrastructure assets such as highways and power transmission assets.
  • While InvITs invest in infrastructure projects such as roads or highways, which take some time to generate steady cash flows, Real Estate Investment Trusts (REITs) are an investment vehicle that owns and manages investment grade and income-producing real estate properties such as offices, malls, industrial parks, warehouses, hospitality and healthcare centres.
  • While InvITs can be publicy listed, private listed or private unlisted, REITs must be publicly listed. Regarding income stability, REITs provide stable income and yield as 80 per cent of REIT assets are income-generating assets with long-term rental contracts. On the other hand, InvITs’ cash flows are less certain as they are dependent on multiple factors, including the capacity utilisation of the underlying assets and scalability of tariffs.

How critical are InvITs for funding India’s infrastructure projects?

  • InvITs present attractive investment opportunities and are only expected to take wings given the huge expected government outlay for infrastructure projects. The government had already identified InvITs as a way to attract large institutional long term investors in infrastructure space.
  • The Government’s National Infrastructure Pipeline estimates funding requirements of over $1.4 trillion by 2025. Of this, private sector investment in infrastructure is expected to be at least $325 billion. A large portion of this could come through InvITs. To allow for capital recycling and further investments under PPP modes, InvITs play a key role in the monetisation of existing projects in some of these sectors (with conducive regulatory frameworks, cash flow profile, and taxation advantage).
  • InvIT helps developers release their invested equity and deploy capital in new projects. This could enable them to address the challenge of projects with high capex demands. Another advantage of InvITs for companies is that proceeds raised from such vehicles are not counted as debt. Similarly, as the company launching InVIT does not dilute any of its shares in the process, it does not count as equity either.

National Infrastructure Pipeline

  • Launched in August 2020, the National Infrastructure Pipeline (NIP) is a first-of-its-kind, whole-of-government exercise to provide world-class infrastructure across India, and improve the quality of life for all citizens.
  • It is a group of social and economic infrastructure projects slated to be established over a period of five years with an initial sanctioned amount of ₹102 lakh crore.
  • The NIP aims to capture key greenfield and brownfield projects for investments across all economic and social infrastructure sub-sectors on a best-effort basis.

Reasons for Lack of financing in Infrastructure Project in India:

  • Firstly, infrastructure projects are often complex and involve a large number of parties. Infrastructure often comprises natural monopolies such as highways or water supply, and hence governments want to retain the ultimate control to prevent an abuse of monopoly power. This requires complex legal arrangements to ensure proper distribution of payoffs and risk-sharing to align the incentives of all parties involved.
  • Secondly, infrastructure projects are long term and are therefore subject to various risks including those due to changes in policies, delays in clearances, etc. Every event that delays the implementation of a project leads to cost and time overruns that in turn have a bearing on the techno-economic viability of the project or would necessitate revision in the price of the end-product. Very often the infrastructure products are meant to serve public good which imposes a limitation on ability to determine their price.
  • Thirdly, where debt financing is dominated by the banking system, the fundamental problem posed by the asset-liability mismatch is critical. In India, the dominance of PSBs may partly offset this risk because the perceived assurance of government backing provides the requisite flow of deposits.

How India can Maximise Infrastructure Investment?

  • India needs to diversify the sources of infrastructure financing. Unlike other emerging markets, India has relied primarily on the government budget for financing infrastructure projects, with nearly 70 per cent of funding coming from government budget. The financing mix of infrastructure projects needs to change to scale up the contribution of the private sector to increase to nearly 50 per cent of financing of infrastructure projects.
  • There exists a tool to attract private investments in infrastructure projects through public-private-partnerships (PPPs). It offers the efficiency incentives for alternative sources of financing through competition for a contract. India has made progress towards promoting PPPs, especially in electricity and road sectors. This can be scaled up to other sectors, including ports, railways, water and sanitation, and social sectors.
  • Private investors need a credible regulatory and institutional regime, and contract management, that reduces the time taken for market assessment, socioeconomic impact, affordability, bankability of projects, and future negotiations. Improved institutional capacity will improve the underlying relationships on PPPs, help to make more informed decisions, and reduce the possibilities of renegotiations in the future on PPPs.
  • Fiscal reforms will reduce contingent liabilities, and also generate more revenues to bridge the infrastructure financing gap. Policymakers will also need to avoid the potential for currency mismatches from borrowing in foreign currency for projects that generate revenues largely in local currency. Domestic capital markets, especially green local currency bond markets, will play a critical long-term source of financing for infrastructure projects.

Way Forward:

  • Most economists agree that infrastructure investments are a key driver of economic growth leading finally to inclusive development.
  • India’s investment in the Golden Quadrilateral Highway project is a great example of how infrastructure investments promoted entrepreneurship, economic growth and job creation.

Source: The Hindu BL

Mains Question:

Q. What are Infrastructure Investment Trusts? Discuss reasons for lack of financing in Infrastructure project in India. How India can maximise infrastructure investment? Examine.