Is infrastructure repackaged in listed form on the agenda for Asian Infrastructure Investment Bank?
When it comes to India at least, the answer from AIIB appears decidedly positive, in line with a small but growing group of investors from the private sector. And it could yet be replicated elsewhere.
“As a matter of fact, yes, we would,” said the AIIB's principal economist, Thia Jang-Ping, when asked if the China-led multilateral lender might invest in infrastructure investment trusts (Invits).
“It's all up to the risk manager to set the limit [for investing in Invits], [but] something comfortable would be $100 million to $200 million,” he told AsianInvestor.
Invits, first introduced in 2016 in India, are listed securities that aim to attract local and foreign investors to help fill the country’s growing infrastructure funding gap, with $4.5 trillion of needed investment projected over the next 25 years.
Two invits were listed publicly on the Securities and Exchange Board of India (SEBI) – India Grid Trust and IRB InvIT Fund. Shares in two others, Brookfield-backed India Infrastructure Trust and IndInfravit Trust, were placed privately.
However, AIIB will only invest in these vehicles on one, perhaps inevitable condition.
“When we buy into these [infrastructure] unit trusts, we want to see that the capital that we free up in the process get recycled into new infrastructure,” Thia said.
India has previously been dubbed a “priority for AIIB”.
AIIB’S plan to acquire stakes in Indian Invits follows that of both international and local investors.
The C$356 billion ($270 billion)-Canadian Pension Plan Investment Board (CPPIB) and Allianz Capital Partners acted as anchor investors for the placement of IndInfravit shares. Domestic asset owners – including Reliance Nippon Life Insurance, a joint venture between Indian conglomerate Reliance and Japan’s Nippon Life Insurance – have also invested in Invits.
PROMISING NEW MODEL
Thia said that successful toll-road projects under the Public–Private Partnership (PPP) model are helping to drive the development of Invits in India as the country moves away from more traditional funding channels, notably bank lending.
He added that banks have had “issues with legacy infrastructure non-performance loans on the balance sheet” and that India would rely more on PPP and for the public sector to put in around 40% in terms of grants and viability gap payments to make projects appealing for investors.
“The toll road programmes are now successful and they are now bundling the operational toll roads that are no longer in construction phase into an investment trust,” Thia said.
“I think it's a very promising model for other countries to follow,” he told AsianInvestor.
The Indian authorities have also made privately issued Invits more attractive for long-term foreign institutional investors by offering long-term tax incentives. Those who hold onto these vehicles for more than three years are subjected to lower levels of taxation on any income earned from the transfer of trust units – 10% instead of 15%.
Nevertheless, hurdles remain for this investment model, whose adoption is still in its early stages.
“The unit trust is an attractive model but so far it's only happening in India on the toll road. I don't want to give the impression that this model is very successful across Asia,” Thia said.
He added that the legal framework for Invits was one notable challenge because of the collaboration required of multiple agencies, including the local stock exchange, financial regulator and transport ministry.
“It takes several ministries in a country and a supportive legislation to make that kind of secondary asset-market functioning. It's actually not easy,” Thai said.
The Invit model might also not work for all types of infrastructure asset.
He said that the model could be attractive for bundled assets with regular tariff revenue streams from the government and the off-takers, such as electricity generation plants or toll roads.
But not all. “I think it all depends on the market,” he said.