Infra-Nirbhar Series: Revenue Secretary Dr T.V Somanathan On Funding The ₹110 Lakh Crore National Infrastructure Pipeline

Massive increase in capital expenditure by both union and state government, recycling of public assets, leveraging the institutional framework of the proposed Development Finance Institution (DFI), incentivising private capital inflow and deepening bond markets will serve as the major sources of funding the ₹110 lakh crore national infrastructure pipeline (NIP), Union Expenditure Secretary Dr T.V Somanthan said on Tuesday (Feb 23).

Addressing a webinar on ‘Funding The National Infrastructure Pipeline”, jointly organised by Swarajya Magazine and Construction World as part of Infra-Nirbhar series, Dr.Somanathan said that the impressive capex allocation of ₹ 5.5 lakh crores in FY22 budget (representing an impressive 35% growth over the allocation in FY21) is a clearest signal that the Union government is willing to do the heavy lifting on its part to fund the NIP pipeline.

Dr.Somanathan began his address by highlighting the special economic characteristics of infrastructure projects and their unique funding requirements.

Pointing out that most infrastructure assets tend to have the character of what in economics is described as ‘public goods’, Dr.Somanathan cited the example of metro projects which require large upfront capital expenditures, but despite ability to garner a steady stream of revenue they are unlikely to off-set the large investment.

Using financial measure alone to calculate the effectiveness of infrastructure projects would be hugely limiting as it will not factor in the ‘social returns’, Dr. Somanathan said. He gave the example of Metro rail system that benefits road users by reducing congestion and boosts housing projects away from city centre by making commute easy.

If Net Present Value (NPV) is used to determine the economic viability of Chennai metro (which he once headed), it would be less than 5 per cent, but if we including the positive externalities of the project, the returns are high as 19-29 per cent, he pointed out.

The revenue secretary said that most infrastructure projects have long gestation period that necessitates long-term capital to finance them. That some infrastructure could take as long as 15 years for reaching the stage of economic viability makes it challenging for conventional private investors who tend to have shorter time horizon, he added.

Pointing out that metro rail systems in most capitalist nations are either state funded or state operated enterprises, Dr. Somanathan said that the intervention or support of government in funding and building infrastructure is inevitable and indispensable.

Elaborating on government’s plan to fund the Rs 110 lakh crore National Infrastructure Pipeline, the Revenue Secretary identified 5 major sources

1. Enhanced capital expenditure by union government: Dr. Somanathan said union government has already taken first step in this year’s budget by providing a whopping 35% increase in the allocation for capital expenditure. He said that seriousness of government ‘s commitment to allocate resources for infrastructure can be gauged by the fact that it sought to undertake this spending without pruning subsidies or expenditure in social sector.

Enhanced Capital expenditure by state governments– Dr. Somanathan highlighted the various initiatives by the Union government to prod the states to focus on capital expenditure including the additional budget of Rs 25,000 crore that was provided to states in FY 21 as capital expenditure to develop roads, defence, water supply, urban development and domestically produced capital equipment. He also highlighted the thrust given to capital expenditure of the states via Centre issuing a special interest-free 50-year loan to States of Rs 12,000 crore.

2. Recycling of all public sector assets– Monetisation of public assets especially in the area of railways, highways and power will be vital for infrastructure funding, Dr. Somanathan said. Various asset-owning ministries, CPSEs and local bodies can reduce their debt burden by monetising their asset portfolio which will enable fresh and further investment in creation of infrastructure assets, he added. Dr. Somanathan also said that asset monetisation will create an environment for participation of long-term institutional investors and pave way for private sector efficiencies in the management of infrastructure assets.

3. Development Finance Institution – Dr. Somanathan said that the setting up of Development Finance Institution (DFI) that was announced in the budge (a bill on it has been introduced) will provide a new institutional framework for attracting massive investment in infrastructure. He said that union government has allocated Rs 20,000 crores in the union budget for capitalising the new DFI.

4. Encourage private investment in infrastructure to flow in Infrastructure: While pointing out that National Investment and Infrastructure Fund (NIIF), the state-supported sovereign wealth fund aimed at attracting private capital has gained some traction, Dr.Somanathan acknowledged that much more needs to be done. He said PPP initiatives in railways have gained momentum. He also said that it will be critical to increase flow of patient capital including pension and insurance money into infrastructure financing. He said the DFI bill permits setting up of private DFIs.

5. Deepening Bond Markets: Dr. Somanathan said that government has taken several steps to stimulate long term bond markets. In the latest budget, a facility for backstop of long-term bonds was announced, which will create a market making institution, which can provide liquidity to long term bonds.

The revenue secretary also responded to questions by moderators Pratap Padode, founder & executive director at Smart Cities Council India and Dr. Shubhada Rao, economist. While conceding that NIP was for largely greenfield and brownfield pojects, he said that they best way to address stalled projects would be through a combination of various methods including through the ‘bad bank’ which was unveiled as part of the recent budget.

Dr.Somanathan also said that pace of land acquisition and protests by local community will continue to be a risk for timely completion of the projects. He said the not even best-in-class projecting planning cannot all factor in issues like protests by locals.