3 min read.Updated: 25 Nov 2020, 11:48 AM ISTJagannarayan Padmanabhan,Mukul Pawar
Social infrastructure projects are foundational assets that support the quality of life of a nation, region or city and go beyond basic economic functions to make a community an appealing place to live
Raising India’s standing on development yardsticks will require adoption of innovative financing mechanisms – and tweaks where necessary – to push up investments in social infrastructure, alongside funding economic infrastructure.
Social infrastructure projects are foundational assets that support the quality of life of a nation, region or city and go beyond basic economic functions to make a community an appealing place to live – healthcare facilities, schools and other educational institutions and water and sanitation, to name some.
The public sector tends to be the most dominant financing source in social infrastructure, especially in education. While private investments in the healthcare and education sectors have picked up of late, these pale in comparison to investments in economic infrastructure sectors such as roads and power due to their smaller ticket size. Also, there is a distinct lack of investable projects in sectors such as primary and secondary hospitals in rural areas besides outputs being difficult to measure, and subject to political risks.
Financing mechanisms that can help
• Partial credit guarantee to help private developers raise cost-effective funds for social infrastructure projects at a portfolio level through capital market instruments and channel long-term institutional investments. The idea is two-fold – reduce the potential financial loss (for a predetermined amount) for the lender in case of a financial default, and benefit the borrower through better access to lower-cost credit compared with that without any credit enhancement. First loss guarantee will ensure the Credit Guarantee Facility (CGF), backed by sovereign guarantee (ideally central government) will reimburse a pre-defined share of the principal and interest overdue should the borrower default
The success of increased bank lending to micro, small and medium enterprises (MSMEs) under the ₹3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) can be replicated here once banks’ concerns related to creditworthiness of social infrastructure projects is allayed.
• Minimum offtake guarantee by government with timely funding of related payment dues, to private borrowers, with liquidity backup to mitigate the risk of default arising from liquidity mismatches for the issuer of a debt instrument.
Availability of liquidity backup (covering debt obligations for a defined period) can improve investor confidence in the respective instrument (based on availability of liquid investments such as cash/ unpledged marketable securities).
• Minimum return guarantee for investors. Sectors like airports have in-built characteristics to ensure a minimum return to investors courtesy a stable regulatory mechanism that allows for regulated returns on aeronautical assets, and true-up on account of variation in actuals and forecasts, including traffic variations.
• Pooled funding to allow less-creditworthy entities like small and medium cities to aggregate their financing needs, diversify their credit risks, offering scalable investments for investors besides spreading transaction costs. The mechanism opens up avenues for projects/ entities that have inherent credit risks and might not get funding from a single entity.
Picking appropriate PPP structure is important
Instead of a 100% “user pays" model, the end user can pay subsidised charges. The revenue model for private developer may be a mix of subsidised and market determined charges based on eligible beneficiaries for a particular government service, while other users pay market-determined prices. Not all “hard" social infrastructure need be paid by users/ taxpayers. Some can, at least in part, be cross-subsidised by connected services, e.g. shops, restaurants, mixing commercial and social homes, etc.
“Value capture" is one mechanism for the public sector to regain some of the indirect benefits of projects.
A host of other tweaks also possible
The possibilities are many – among others, social infrastructure involving real estate, such as student accommodation and care homes, with steady expected income from users or hybrid fees; PPPs for schools, hospitals, etc., with availability payments from trustworthy public authorities; municipal bonds or other dedicated sub-government instruments; social or sustainability bonds, with end use focused on social infra assets; impact and community investments, via funds or directly by asset owners, into social infra projects; cost-efficient bundled social investment vehicles for smaller, less-resourced investors.
Also, investment by the private sector in social infrastructure (health and education) may also be considered eligible under corporate social responsibility (CSR) obligations to attract more private funds and resources in such projects.
Meanwhile, several global investors have expressed interest in investing in environmental, social and governance or ESG funds. This offers an opportunity as social infrastructure assets are ESG compliant.
Jagannarayan Padmanabhan is Director, CRISIL Infrastructure Advisory (CRIS) and Mukul Pawar is Associate Director, CRIS
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