With 2019 underway, it would serve us well to look at some of the most pressing needs of Indian infrastructure. Trends in global capital markets and the needs of Indian infrastructure have broadly remained the same, but so have the challenges.
Recent news that the euro 399 billion Dutch pension fund ABP has lowered the expected investment returns over the next 10-15 years at five per cent a year on average from the earlier six per cent (Investment & Pensions Europe) shows the pressure the global pension fund community is under to deliver investment returns.
Additionally, a quick look at the Q4 2018 report of another Dutch pension fund, PFZW, shows a reduction in the current funding ratio from 103.4 per cent to 97.5 per cent. In layman’s terms, the value of current and future outflows from PFZW is higher than the value of the assets.
The data yet again drives home the point that in the face of constrained investment returns, the demand for annuity-type structures is even higher amongst the global capital providers.
While India has been aware of these trends and has made a concerted effort towards facilitating the flow of capital, now is the time to further provide impetus to the idea of “utilising global capital towards building Indian infrastructure”. The agenda for 2019 must be to build on and deal with issues that have slowed infrastructure creation in India. The core issues that need attention remain the same – local market funding to facilitate foreign capital inflows, a more efficient land acquisition strategy, better linkages in policies across infrastructure segments and, to the extent possible, allowing market prices to prevail.
India needs to find a better solution towards providing local market credit to infrastructure projects to facilitate foreign capital inflows. For a capital provider, it is vital that local players partake in the risk-taking regarding infrastructure projects.
While Indian banks have cut back from infrastructure lending, a complete pullback is not feasible given the size of the balance sheets that banks wield and given the infrastructure funding requirements. The key for banks is prudent risk management and effective project selection. Additionally, other local funding sources such as the National Investment and Infrastructure Fund (NIIF) and revamped Development Finance Institution type structures will be crucial.
The fundamental reason why local funding in infrastructure projects gives foreign investors greater confidence is that knowing local capital has “skin in the game” implies more protection for their money.
Land acquisition remains a significant challenge for infrastructure creation. Recent issues that specific solar projects faced with getting access to land further elucidates this fact. The critical step here is to gradually tie-up land allocation and project allocation through the sector-specific agencies at work.
Bundling project and land allocation implies that for instance, when solar tenders are allocated, the planning on the associated land required is done concurrently with the tender and not after the tender process. While the issue around land acquisition is complex, land is the most crucial component of infrastructure creation in possibly every segment. Therefore, urgent attention is due.
Co-operation within infrastructure segments, especially through policies that consider sectoral interlinkages is crucial for the infrastructure ecosystem to deliver value. Power generation adds value when transmission and distribution assets can assist in giving the power to end users. Biofuels can add value when the water required to generate the raw material for them does not impede other more critical water needs in an economy.
Continually asking questions and ensuring that policy consistency is maintained across interlinked infrastructure sectors is the only way for infrastructure to indeed create value for all.
While infrastructure assets vary significantly on the level of regulatory purview, it is essential that regulations are prudently used and do not stifle risk-taking and value creation. Asset returns need to be adequate to compensate for the risks involved to get both global and local capital to fund Indian infrastructure. Therefore, it is essential that greater focus is paid to tariff pricing, especially to the drivers of tariff rates. One size fits all solutions will lead to inefficient outcomes in the long-run.
Now is the time to further push forward with policies that can help further facilitate the flow of capital into Indian infrastructure. It is also essential to realise that such changes are gradual, small iterations in the right direction can have significant positive lasting effects.