The infrastructure sector serves as the backbone of economic development, enabling growth and societal progress. In the near future, this sector will be playing a major role in advancing INDIA to a 5 trillion-dollar economy. However, traditional modes of financing often fall short in meeting the colossal financial demands required for infrastructural development. Alternative finance mechanisms are emerging through digital technologies like crowdfunding and tokenisation, helps transcending the limits of traditional banks and providing a lower entry cost for retail investors. They can also demonstrate community interest, sending a reassuring signal to larger institutional investors.
Several factors contribute to the urgency for alternative financing:
- Insufficient Public Funding: Government budgets often prove inadequate to cover the expansive costs of infrastructure projects. Shrinking public funds and competing priorities compel exploration beyond traditional funding sources.
- Challenges at Private participation: Private-sector participation in infrastructure (PPI) comes mainly through privatisation and public-private partnerships (PPPs) and it leans more on the debt market, especially bank lending. Commercial bank loans, specifically syndicated loans, are the primary mechanism to fund infrastructure; the bond market is still developing. Equity issuance and corporate bonds represent another source, but tough to have a right balance between fund and share. High dependency on debt market (banks), makes it very difficult to get the right amount of fuel required.
- Banks – the major source of funding in country: The centrality of banks in funding infrastructure poses three challenges: lending duration, volume of loanable capital and community engagement. These problems arise due to multiple reasons like loanable funds are largely composed of demand deposits, the tenor of their investments is limited these investments hardly grab attention of public.
- Risks and Uncertainties: The adequacy of risk assessment, particularly for large transactions like infrastructure projects, is a key consideration in promoting alternative finance. Infrastructure as an asset typically has substantial upside. However, the experience of banks in India indicates it can also be a drag on the balance sheet of lenders if vetting is weak.
- Global Economic Challenges: Economic downturns, such as the recent global recession, have strained public finances. During tough economic times, governments may cut back on infrastructure spending to allocate resources to more pressing needs. In such times, alternative financing models can provide resilience and stability to infrastructure investments.
The way forward involves exploring and implementing a spectrum of alternative financing mechanisms apart from the existing ones:
- Infrastructure Bonds and Green Financing: Issuing infrastructure bonds and embracing green financing initiatives attract investors interested in sustainable projects. Green bonds, for instance, fund environmentally friendly infrastructure, attracting a specific pool of investors. Although this has been introduced in the market already, but there is enough scope of scaling the financing method.
- Crowdfunding and Community Investment: Engaging communities through crowdfunding platforms or local investment initiatives can garner support and funding for smaller-scale infrastructure projects. Crowdfunding can take the form of debt, equity, royalty, reward, or donation. Crowdfunding marketplaces customarily have lower investor entry cost than traditional securities markets, albeit online securities trading platforms for retail investors have proliferated. Additionally, the investors know of specific projects as opposed to general corporate needs in the traditional securities markets; recent innovations such as infrastructure bonds might be an exception.
- Tokenisation: Tokenisation in the context of infrastructure divides the value of assets or the underlying securities (debt or equity) into smaller parcels before they are offered to potential investors. The tokens come in digital format to represent a claim on the physical asset or security. They are launched on blockchains guided by the terms of the smart contracts. Fraud and speculation may have dented the growth in fundraising through coin offerings, however, the concept of tokenisation can still potentially raise capital for infrastructure either through debt or equity.
- Asset Recycling and Securitization: Governments can unlock capital by selling existing infrastructure assets (non performing) to private investors and then reinvesting the proceeds into new projects. Securitization involves bundling cash flows from multiple projects into tradable securities, attracting diverse investors.
In conclusion, the quest for alternative financing in the infrastructure sector is paramount to overcome funding challenges, expedite project implementation, and support sustainable development.