Building India Inc Through Targeted Infrastructure Investments: The Way Forward

For those in infrastructure or infrastructure adjacent businesses, the Union Budget 2022-23 brings better than expected growth and a plethora of opportunities that will keep their metres running at least in the medium term. For those in manufacturing and adjacent businesses, this budget is the answer to several logistics complaints - a pan Indian, multi-modal transport network that will significantly reduce logistics costs, and boost export competitiveness. For salaried taxpayers, the Gati Shakti roadmap promises better use of our taxes by eliminating the haphazard (lack of) planning we are so accustomed to seeing. For the aam aadmi, this budget promises a socio-economic transformation at a speed India is yet to see.

Infrastructure is often the basis on which countries transform themselves. The New Deal in the USA in the 1930s lifted the country off its feet after the Great Depression. Transit oriented development did the same for Japan post World War II, and South Korea grew at an average rate of 10% per annum between 1960-1990. China set a similar pace during 1980-2010 for the same reason. These resulted in rapid socio-economic transformations, within a generation, in these countries.

National Infrastructure Pipeline and Gati Shakti: Fast Tracking the Indian Dream

The National Infrastructure Pipeline (NIP) was created with a similar aim to meet the $5 trillion economy target by 2025. It was launched in 2020 with projected infrastructure investment of around Rs 111 lakh crore during FY 2020-2025 to build infrastructure across the country. NIP was launched with 6,835 projects, which was later expanded to over 9,000 projects covering 34 sub-sectors. Of course, the Coronavirus pandemic slowed things down. However, this year, FM Nirmala Sitharaman is confident that we will meet our capex utilisation targets.

In what is being called "the most capitalist budget" by the opposition, the Finance Minister announced an increase in capital expenditure by 35.4% to Rs 7.5 lakh crore, or 2.9% of the GDP, in the next financial year. This investment in modern infrastructure will be largely driven by the PM Gati Shakti program. Under this program, key infrastructure sectors such as Roads, Railways, Airports, Ports, Mass Transport, Waterways, and Logistics Infrastructure are expected to get focussed attention and sectors like Energy Transmission, IT Communication, Bulk Water & Sewerage, and Social Infrastructure would play a complementary role to drive forward the infrastructure agenda.

In an interview with Network18's editor in chief Rahul Joshi, the Finance Minister talked about the multiplier effect of capital expenditure. She said, "For every Rupee you spend, there is a multiplier of 2.95 (approx) as opposed to when you're giving money through revenue expenditure, you get less than the rupee that you spent." She also expressed confidence that the government's capital expenditure would kickstart a “virtuous cycle of investment” and crowd in private investment.

Private Sector Participation: Will It Rise To The Challenge?

History of Private Participation in Infrastructure
India's history with Private Investment in Infrastructure has been a patchy one. Private sector participation boomed during the 2010-2015 period with participation in Airports, Electricity, ICT, Natural Gas, Ports, Railways, Roads, Treatment/ Disposal, Water and Sewerage. 2010 saw a significant increase in roads and transport in particular, with aggressive bids by large players. The PPP model, however, was failing all parties. By end of FY17, banks had gross non-performing assets (NPAs) of 9.5% of gross advances valuing up to Rs 7.65 lakh crores. 60% of stressed assets were attributed to 5 sectors alone: steel, textile, power, telecom and infrastructure. Stressed assets in infrastructure had reached 17.4% in the year FY13 and stood at 18.6% by September 2016. It surprised no one that private investment in infrastructure fell from 37% in 2008 to just 25% in 2018.

By this time, there were hardly any players left who had the balance sheets to take on massive infrastructure projects, and bank funding was shrinking as a natural result of high NPAs in this sector (18% of infrastructure loans are NPAs today, according to the RBI). The switch from the PPP model to the EPC model was thus inevitable. By freeing up private parties from the responsibility of acquiring clearances, permissions, preventing and mitigating other problems that may arise in course of the project, the EPC model allows them to focus on planning and designing the project, procurement of raw materials and the construction work which reduces time required in the completion remarkably.

Enabling Private Participation in Infrastructure: Steps in the Right Direction

By creating a comprehensive plan for infrastructure, coordinating the efforts of 16 different ministries, the PM Gati Shakti plan also creates enormous surety in infrastructure projects. For instance, one of the reasons why developers shy away from toll roads is because they have no future visibility into what other competing toll roads are likely to come up in the same geography and how they would impact traffic and toll flows to the project they're evaluating. Gati Shakti takes that uncertainty away, and in fact, allows developers to factor in the effects of not only other road projects, but also of railway, housing and social infrastructure projects for the next 25 years, into their planning.

By increasing the overall capital allocation for infrastructure, the government is giving everyone the comfort that the government's focus is clearly on infrastructure. So while the budget doesn't focus on debt capital per se, this gives comfort to lenders to participate - knowing that the capital allocation means that monies will flow in a timely manner.

Creative finance solutions like InvITs and MLDs have seen traction in recent years. InvITs are a great way to monetise operational projects, freeing up capital for investment in new projects. For Green field projects though, we still need to give lenders more confidence. One great way to do this is by empowering them with the right information at the right time.

Big Data Analytics and Insights: The Way Forward for Lending Decisions

In her interview with MoneyControl, Sitharaman also talks about the great strides India has made in digitisation - from Aadhar, to land registry, to e-payments, to GST. She talks about the importance of India's digital stack needing to talk to one another; and also being able to talk to its partners in other countries. She talks of India's leadership (and surefootedness) in this area, and it's ability to determine global policy by leading the way.

This is where companies like CredAvenue come in. By creating a platform that references public data sets and subscribed databases, CredAvenue is able to provide crucial insights and analytics to lenders when making the decision to sanction, as well as during fulfilment. If the underwriting is done accurately with the help of data science and several analytical tools available, followed by continuous monitoring of the credit, then the instances of default can drastically come down. This can set off a self fulfilling positive spiral, further bolstering the confidence of lenders, and consequently improving the overall funding access for the sector.

For institutional lenders, access to information is often a challenge. In fact, most PSU banks rely on self reporting by borrowers, of the reports and data they need to make the sanctioning decision. This data tends to be, by nature, incomplete, as it pertains only to the project and the developer, and therefore doesn't include a wide enough data set. CredAvenue uses data from subscribed database services and public data sets like IHMCL (countrywide toll collections on national highways), RERA websites (countrywide real estate residential projects data on sales, bookings, construction, etc), NIP website integrations that allow IIG updates on all projects covered under the NIP.

This creates a one stop source of information to make sanctioning decisions. For instance, when underwriting a toll road project, the PSU Bank has clear data that indicates toll collections and projections for that geography, other road projects planned (to assess whether competing toll roads are coming), residential projects and social infrastructure projects like hospitals, etc in the coming 25 year period. In addition to the data itself, CredAvenue's platform generates algorithm based projection models that factor in all key information from relevant databases, thereby empowering banks to make quality underwriting decisions.

But that isn't enough. Once the monies have been sanctioned, lenders need to scrutinise how well the money is being utilised - is it being used for the purposes it was sanctioned, or has it flowed elsewhere. What does the project MIS say - is it keeping pace with projections (are toll collections and traffic flows in line with those projected)?

CredAvenue provides continuous monitoring of credit to manage risk of default. In fact, it also looks at larger sectoral and policy changes that can impact the project and the credit the lender has exposure to, in addition to watching for early warning signs like resignations of key personnel from the board of directors, and default/stress in group companies. In fact, every single one of these occurrences triggers an alert to the lender, providing them the insights they need, on time. In this way, CredAvenue goes beyond mere credit syndication, and becomes a knowledge and information partner that stands with the lender till the last rupee is repaid.

Conclusion
Infrastructure investment has the power to create massive GDP multipliers that will enable India in achieving its goal of a $5 trillion economy by 2025; and the Budget 2022-23 has put it's best foot forward. India Inc needs to do everything it can to create confidence for private capital to enter the fray, and participate in building the bones of this nation.

Digital businesses have a critical role to play in this as technology enablers.

Moneycontrol journalists were not involved in the creation of the article.