Introduction
Infrastructure projects and their funding are crucial in the development of any economy. The importance of infrastructure projects lies in the fact that they provide the backbone for growth and development.
To keep up with the Indian infrastructure needs and looking at the growing bond market, India Infrastructure Finance Company Ltd. (IIFCL) is planning to invest Rs. 2,000 crores in infrastructure project bonds by the end of March 2022.
The company will only invest in AAA and AA-rated infrastructure project bonds to develop a long-term infrastructure debt market.
The IIFCL’s asset quality would increase thanks to this, allowing the company to access long-term financing, which will provide a more stable financial environment for the infrastructure sector, particularly through bond markets.
What are project bonds?
There are different types of bonds in the market - project bonds are one of them. Project bonds are a type of debt instrument that is created to finance a specific project. It pays out funds from the revenue generated by that project, and it typically lasts for a long time.
The revenue from a project bond comes from a single source, the project in question, making it attractive for investors looking for stable and long-term investments. Hedge funds, retirement funds, and pension funds can be drawn to these bonds because they are long-term and available for sale in the form of bonds.
Project bonds are usually issued by governments or authorised infrastructure companies or NBFCs, and they also trade on the secondary bonds market.
Why are project bonds in demand?
Regulations have been tightened in the wake of the 2008 financial crisis, and banks are now subject to stricter lending requirements. One consequence of this is that banks can no longer fulfil the financing needs for significant infrastructure and energy projects.
Alternative financing for infrastructure projects such as project bonds has been an integral part of overcoming this gap.
However, project bonds first emerged in the 1990s.
Benefits of project bonds
Some of the benefits of project bonds are:
Project bonds are an alternative way to fund infrastructure-related projects. They provide a new avenue that can be used in combination with more traditional debt financing.
They provide decent returns with tax benefits.
The project bond market is for investors looking for long-term investment bonds opportunities as maturities may extend beyond twenty years.
Project bonds are a chance for institutional investors to participate in infrastructure projects by investing in listed securities that offer a better return than they would otherwise get. These organisations have a vested interest in understanding asset types and are looking at long-term investments that will match their long-term liabilities.
Challenges faced by project bonds
Infrastructure projects are inextricably linked to risk, and as such, they can be tricky to fund.
A potential risk of funding infrastructure projects with bonds is that an investor may be reluctant to take on the investment because of its higher risk. There are also far fewer investors who want to take on a project bond over other forms of debt.
Further, institutional bond investors typically lack experience with construction and are unwilling to take on any form of risk at all.
Some other challenges faced by them are, the volatility involved in financing a project, the lack of understanding regarding the complexities and risks involved, and the pressure on returns because of increasing competition.
Moreover, there is little transparency in the project bond industry, leaving the investor with little to no clarity on where their money is going.
Where are project bonds used widely?
Project bonds have been successfully used to fund infrastructure projects in the U.S. and Europe. They provide an economic boost to the entire region by providing new sources of funds for infrastructure projects.
In India also, bonds for infrastructure projects are being used and there are also tax saving infrastructure bonds that help investors save on tax.
In Africa, two countries stand out in terms of using project bonds for infrastructure development. Both Kenya and Nigeria have a growing investor base.
Investing in infrastructure is a great idea, and the need for it is clear. However, to secure the funds, governments will have to encourage private investors to collect more funds and borrowers to gain higher confidence in the bond market. It will also take a stable environment to make sure governments provide project bonds.
Conclusion
Infrastructure projects are key to supporting the economic growth and government development of any country. They are a constant need to keep the country running smoothly. These projects include roads, bridges, and water supply systems that help improve efficiency and governance.
The government always plans to invest heavily in infrastructure projects and thereby boost the economy. Further, the quality of the infrastructure can be a deciding factor for the competitiveness of a country’s economy.
Thus, given the importance of infrastructure for both social and economic growth, there is an urgent need for more government spending on infrastructure projects.
If investors want to purchased bonds online, they can visit BondsIndia.com