A mini renaissance in alternative financing structures

The National Investment and Infrastructure Fund, Toll-Operate-Transfer model and Infrastructure Investment Trusts offer a trifecta of options for institutional investors keen to tap into the Indian infrastructure growth story, writes NIIF head of strategy and policy advisory Prasad Gadkari.

India is the fastest-growing major economy in the world, with GDP growth of 7.3 percent projected for 2019 – with rapid and sustained infrastructure development critical to ensure this continues over a long period.

According to the latest national economic survey, India is likely to require investments of about $4.5 trillion by 2040 to meet its infrastructure needs. Investment at this scale is beyond the scope of traditional government resources, so clearly the private sector will play an increasing role in meeting India’s infrastructure financing needs. The global and institutional investor community is upbeat about the prospect due to a renewed conviction that the Indian infrastructure space provides a massive multi-decade opportunity for generating healthy, risk-adjusted returns.

The government of India has adopted a programmatic development approach across sectors through both public-private partnerships and EPC contracts: the Bharatmala Pariyojana scheme for highways; Sagarmala for the maritime sector; the Dedicated Freight Corridor to decongest railways; the Smart Cities programme; non-metro, greenfield and regional airports; and the National Solar Mission.

Separately, the government has also initiated focused sectoral reforms to improve the attractiveness of projects, enabling easier churning of capital in sectors such as roads, amending concession agreement provisions in ports, faster dispute resolution for the EPC sector, and the SHAKTI scheme for providing coal to stranded power plants, to name a few.

Traditionally, private capital has come mainly through corporate balance sheets, commercial banks, financial institutions and, selectively, through infrastructure funds. There have also been occasions in the past where multi-level debt leveraging has been used as an indirect route for infusing equity capital into projects.

Given Indian infrastructure’s massive financing needs, the government has facilitated the creation of three alternate financing structures to bridge the gap in availability of private risk capital. All have become operational in the past 12 months and have attracted the support of sophisticated international and domestic financial investors. Here is a brief description of each, the role they play in Indian infrastructure and the potential impact they can have.

National Investment and Infrastructure Fund

NIIF is possibly a first-of-its-kind institutional infrastructure fund manager, created through a public-private partnership format, with best-in-class governance among global infrastructure equity funds.

It has been anchored by the government with a 49 percent stake, with majority ownership residing with international and private institutional investors. The initial set of investors include Abu Dhabi Investment Authority and leading domestic private financial institutions such as HDFC Group, ICICI Bank, Axis Bank and Kotak Life. NIIF is run by a professional management team with Indian and international experience in infrastructure investing. With a commitment of $3 billion from the government and a corresponding  $3 billion being raised from global/institutional investors, NIIF is poised to become the largest infrastructure fund manager in India.

The primary vision behind the creation of NIIF is to establish a channel for global investors to tap into Indian infrastructure opportunities at scale that is meaningful and in a format that mitigates several of the possible hurdles faced by investors in infrastructure investments.

NIIF’s design provides a balance between access to global capital coupled with government partnership and the ability to engage constructively with policymakers to provide an investor perspective on the investment programmes and attendant sectoral issues. The fund manager has initiated its operations across two strategies: NIIF Master Fund, which is focused on aggregation of operating assets and creation of sectoral platform companies; and NIIF Fund of Funds, which anchors third-party managed funds that are focused on a strategy distinct from that of the Master Fund.

The first two investments under the NIIF platform are indicative of the unique investment opportunities it provides. The first investment of the NIIF Master Fund is a joint venture with Dubai Ports to create India’s leading ports and logistics company. The debut investment of the FoF platform is the Green Growth Equity Fund, which is geared towards investing in renewable energy, clean transportation, water, sanitation and related industries in India.

Past experiences have shown there is an increasing need for focus and specialisation while investing in infrastructure. It is not a pure financial play and there is a requirement to develop strong sector-focused knowledge, insights and operating strengths to be successful. The NIIF platform has been created with these tenets in mind, with a view to creating infrastructure management expertise to act as a bridge between the government, private sector and global investors to create a win-win situation for all the stakeholders.

Toll-operate-transfer model

In the wake of an ambitious highways development programme, the government has been sparing no effort to increase the pace of activity in the roads construction programme.

There has been a clear focus on taking steps (e.g. early exit, hybrid annuity contracts etc.) to boost the confidence of private developers and investors. In a context in which typical Build-Operate-Transfer projects are on the slower side, the government has produced the Toll-Operate-Transfer model to attract long-term investors to operational highway and road projects with an established cashflow profile. Essentially, the model involves awarding long-term (30-year) tolling and operation and maintenance contracts to private operators for a package of highway corridors in exchange for a lump sum, upfront payment.

From the government’s perspective, this approach allows for capital recycling, wherein the government builds toll roads, monetises its future cashflows by a virtual ‘sale’ of the operating projects and then, in turn, uses the proceeds to build new projects through cash contracts. It also works well for the investors that may not be comfortable with the development risk at this stage but are happy to take the operation and maintenance and market risks on these projects.

The first transaction under the TOT model – in which the government offered a bundle of nine toll roads totalling almost 650km – was recently successfully concluded. The bid process attracted both global and domestic high-quality bidders and garnered $1.5 billion from the winner. While the government did a very good job structuring the projects in a manner that mitigated several investor concerns, this was also a very interesting deal for private investors, which gained a large-ticket operating asset portfolio to manage for the long term in a market with strong growth potential.

Success of the recent TOT auction has created a new template for the government to engage with the private sector on monetising operating infrastructure projects and is likely to usher in more recycling auctions across different sectors.

Infrastructure Investment Trusts

Infrastructure Investment Trusts have been designed along the lines of the REIT model prevalent in the real estate sector. The broad objective of InvITs is to invite relatively passive capital into lower-risk  operating assets through an instrument that can provide regular and stable cash yields through a tax-efficient structure combined with liquidity of the core instrument through the trading route. It is targeted towards the public markets allocation of institutional investors as well as the high-net-worth retail investor community.

InvITs have created a well-structured win-win proposition for different classes of investors. Early-stage investors, which would typically play an active role in the development phase of a project, can look at InvITs as an exit avenue as the project moves down the risk curve. Late-stage investors with a need for generating stable cash yields over a long horizon, in turn, get a relatively less risky investment opportunity. Not only will InvITs help government and developers unlock their capital for reinvestment, but it is also likely to enable investors to hold a diversified portfolio of infrastructure assets.

Regulators have made efforts to operationalise InvITs through a combination of fiscal incentives as well as incorporating suggestions from the industry during the consultation process. This resulted in two issuances in 2017 – IRB InvIT Fund, with a portfolio of road assets and IndiGrid Trust, with a host of power transmission projects. The two issues garnered more than $1 billion from investors, such as GIC Singapore, DSP BlackRock, Platinum Fund, Schroders, Discovery Global Fund and several other institutional funds and insurance companies.

The initial issuances have helped create this new asset class. The market is expected to deepen as more offerings take place and as the underlying assets create the track record of steady cash yields.


Overall, India is well positioned for growth, following several structural reforms in the country’s financial sector, including the implementation of the GST code that will remove interstate barriers to trade and the new bankruptcy law that will strengthen the country’s banking system.

In parallel, momentum in the country’s infrastructure space continues to increase: 17,000 km of highway contracts awarded last year, 15 non-metro airports proposed to be offered to the private sector and the renewable energy capacity build-up are continuing at a strong pace.

In this context, the emergence of the above new mechanisms has added investment options for institutional investors as each structure is tackling a different aspect of infrastructure development and financing. As such, these three vehicles  can have a game-changing impact for infrastructure development in India.