Role of Project Financing Companies in Infrastructure Funding

Jun 3, 2024

India has achieved significant milestones in infrastructure development. These include the world’s longest highway tunnel, the Atal Tunnel, and the construction of the world’s highest railway bridge, the Chenab Bridge.

With 158 operational airports and the construction of 84 airports over the last decade, India’s aviation network is rapidly evolving.

In the interim budget presented by the finance minister, there was a huge emphasis on investment in infrastructure in the country.

Investment in Railways

The Union Ministry of Railways has been allocated Rs 2.55 trillion (tn) for the FY25, up by 5.8% from last year’s allocation of Rs 2.41 tn, in the interim budget.

Up to 82% of the previous year’s allocation had been spent by the end of January 2024.

A total of 434 projects with an investment of Rs 11 tn will be rolled out under the three economic railway corridor programs: energy, mineral, and cement corridors. These endeavours aim to optimise energy, mineral, and cement logistics, enhance port connectivity, and upgrade high-traffic corridors.

Over the next five years, the Railways Ministry plans to overhaul 40,000 train bogies to provide a better passenger experience similar to that of the Vande Bharat trains. The entire exercise is expected to cost Rs 0.15 tn.

Notably, budget allocation for investment in public sector units and joint ventures has decreased from Rs 343 bn in 2023-24 to Rs 311 bn in 2024-25. Experts say this is because the railways is interested in opening up the market to private players.

The bullet train project by national high-speed rail corridor limited has attracted the significant allocation, up from Rs 195 bn to Rs 250 bn.

Railways is one of the key drivers of the PM GatiShakti scheme and the national logistics policy.

It aims to achieve decongestion of railway infrastructure by 51% by 2024-25.

Investment in Roadways

The Budget for FY25 has raised the capital allocation for the ministry to Rs 2.72 tn from the FY24 budgeted level of Rs2.58 tn.

The government has kept its focus on rapid infrastructure growth in the next financial year with a plan to give another increase in capital expenditure allocations for the Ministry of Road Transport and Highways (MoRTH).

The capital allocation for the sector would rise further to maintain focus on building more highways and access-controlled expressways in the country.

MoRTH had indicated that its capex may rise to Rs 3.3 tn in FY25 when the new government presents the full budget.

A look at the expenditure trend of MoRTH highways shows that the balance of government spending has shifted towards capital spending over the past few years.

Apart from the focus on capital spending, the quality of expenditure has also seen an improvement with maximum funds going to NHAI which had a mandate to build highways and expressways in the country.

The government of India has allocated Rs 111 tn under the National Infrastructure Pipeline for FY25. The roads sector will likely account for 18% of capital expenditure over FY25.

To sum up, the Indian government has been actively investing in road infrastructure development. Major initiatives like the Bharatmala Pariyojana aim to upgrade and expand the road network, including constructing expressways, economic corridors, and feeder routes.

Investment in Renewable energy

From strengthening rooftop solar to promoting electric vehicles and biomanufacturing, the interim budget focused on various initiatives for achieving energy sustainability.

The Interim Budget earmarked a corpus of Rs 6 bn under the National Green Hydrogen mission, doubling the allocation compared to the previous year.

The fiscal allocation for the development of solar power grid infrastructure reached Rs 85 bn in the interim budget.

Plan to tackle the Decline in FDI

While investment in infrastructure by the center is rising, net FDI (Foreign Direct Investment) declined to US$ 10.6 billion (bn) during FY24 from US$ 28 bn in FY23, mainly reflecting higher repatriation.

However, gross inward FDI almost remained stable at US$ 71 bn in FY24. Singapore, Mauritius, the US, the Netherlands, Japan, and the UAE contributed to more than 80% of the flows to India in FY24.

With a sharp 62% decline in net FDI to India in FY24 and the difficulty in finding non-budget funds to finance infrastructure projects, the centre is preparing a multi-pronged action plan to attract long-term capital of an additional US$ 50 bn per year from abroad.

The centre is targeting foreign investment in national highways and railways, which are currently funded through the budget as well as newer areas like green energy ventures such as solar, wind, and green hydrogen.

It is believed that there is a lot of interest in greener sustainable infrastructure investment among foreign investors. The government has an understanding with the USA while Europe is also willing to invest in such projects.

The government departments in a coordinated manner will clarify and address emerging issues related to investments for their faster resolution to make sure projects are investible and bankable.

Accordingly, the government has begun talks with a host of countries to reach an understanding to channelise a portion of their large pool of capital.

India will then gradually moderate public capex growth to achieve fiscal consolidation.

According to an estimate, India requires nearly US$ 2 tn in infrastructure investment between now and 2030.

With infrastructure investment gaining pace, the most benefitted companies are those that finance or assist the center in funding the infrastructure.

Let me take you through three significant companies that are profiting from this move.

#1 Rural Electrification Company (REC)

REC is a central public sector undertaking under the Ministry of Power involved in financing projects in the complete power sector value chain from generation to distribution.

REC provides long-term loans and other financing products to state, center, and private companies for the creation of infrastructure assets in the country.

The company recently forayed into lending to the infra and logistics sector.

The company provides loans to metro, road and highways, port waterways, and steel infrastructure developers.

The company’s outstanding loans concerning renewable energy projects are 8%, which is about Rs 389.7 bn.

The government of India has a target for 500 GW of renewable energy installed capacity by 2030. Right now it is 190 GW.

So an additional capacity of 310 GW of renewable energy will have to be added in the next 5 to 6 years. This implies an investment between Rs 15-20 tn.

About Rs 3 tn of business will come to REC, so by 2030, it expects a 10-fold increase in the business in the renewable energy sector.

The company is targeting the entire value chain of renewable energy projects-generation, transmission, electric storage, pump storage, distribution, and electric vehicles. REC is funding solar, wind, hydro, and green hydrogen projects.

The PSU is looking at the non-power infrastructure space as a new opportunity for driving growth. It’s financing roads and expressways, metro rail, airports, IT communication, ports, and electro-mechanical works in respect of various sectors like steel and refinery.

#2 Power Finance Corporation (PFC)

Power Finance Corporation is a systemically important non-deposit taking NBFC registered with the RBI as an infrastructure finance company.

It is engaged in extending financial assistance to the Indian power sector.

The government of India holds the majority stake in PFC at 56%.

PFC has supported 25% of India’s installed renewable energy.

Power Finance Corporation (PFC), has sanctioned a substantial Rs 107.63 bn for critical power infrastructure projects.

This financial support underscores PFC’s commitment to advancing key initiatives in power generation, transmission, and distribution, contributing to the overall growth and reliability of India’s power sector.

The company disbursed 82% of loans to government sectors.

#3 Indian Renewable Energy Development (IREDA)

Indian Renewable Energy Development Agency Ltd (IREDA) was incorporated as a fully owned government of India enterprise under the administrative control of the Ministry of New and Renewable Energy (MNRE).

The company was established for the promotion, development, and commercialisation of new and renewable sources of energy and provides financial assistance to energy efficiency and conservation projects.

IREDA has financed projects across multiple renewable energy (RE) sectors such as solar power, wind power, hydropower, transmission, biomass including bagasse and industrial co-generation, waste-to-energy, ethanol, compressed biogas, hybrid RE, and green-mobility.

The Reserve Bank of India (RBI) has granted an ‘Infrastructure Finance Company (IFC)’ status to IREDA in the year 2023.

With the IFC status, IREDA could take higher exposure in RE financing. The IFC status helps the company to access a wider investor base for fund mobilisation, resulting in competitive rates for fundraising.

The company reported a remarkable 67% increase, in profit after tax (PAT) of Rs 3,355.4 m for the third quarter of FY24.

This performance is attributed to consistent growth in the loan book and a significant reduction in net NPAs from 2.03% to 1.52% year-on-year.

Conclusion

India’s journey towards becoming a developed nation by 2047 hinges significantly on improving its infrastructure, a cornerstone for fostering liveable, climate-resilient, and inclusive cities that drive economic growth.

The government’s commitment is evident through its allocation of 3.3% of GDP to the infrastructure sector in the fiscal year 2024.

The infrastructure sector plays a pivotal role in driving India’s economic growth and overall development.

As the country continues on its path towards becoming a global economic powerhouse, the need for robust infrastructure becomes increasingly apparent.

Public sector financers have emerged as crucial enablers in this endeavour, bringing in much-needed investment, innovation, and efficiency.

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