Axis Infra Index - Trends and Issues

The Index indicates a fairly steady improvement in infrastructure financing conditions over the past decade.

Annexure: Methodology of the Axis Infra Index (AII)

The primary objective of the Index is to convey a sense of investment conditions in infra sectors and the ability of the segment to draw in capital funds. Therefore, the Index places inordinate weight on fund flows, which after all, is the ultimate outcome of all the underlying conditions, the efficiency in commissioning projects, the regulatory environment, tax incentives, etc.

• Output indicators: The intention is to capture primarily supply side performance of selected sectors. Data availability plays an important role in selection of the indicators. Some indicators also have a demand signal built in, e.g., base and peak load demand shortages in electricity.
• Capex Completions / Project Commencements: This shows the value of infra projects getting completed / coming online.
• Flow of funds: Financial closure is a signal of the commercial viability of the project, even with VGF. Fund flows have been separated into equity and debt components, to reflect the different risks associated with each:
  • Equity: Although project finance typically has a 4:1 debt - equity ratio, equity has been given a higher weight in view of the risk characteristic of equity and its role in pulling together debt funds.
  • Debt: Bank loans have been the largest source of debt funds for infra projects. However, data on bank credit flows into projects classified as infrastructure by the RBI is only available at quarterly intervals. We have allocated the quarterly disbursements equally across the three months.
  • Signals from Equity markets: Strong equity market performance is a likely precursor to higher equity market fund flows to the sector as it is an indicator of attractiveness of the sector. The performances of infrastructure sector equity stocks have also been incorporated through the CNX Infrastructure Index.
• Regulatory and policy developments: Because of natural monopoly characteristics, infrastructure segments are amongst the most closely regulated. Due to the non-recourse nature of the project financing, the risks associated with changes in the legal, policy, tax and regulatory environment have a large role in determining commercial viability of projects. The Index incorporates these changes as ordinal indicators.

Choice of base year: April 2005 is chosen as the base year, with the values of the Index components normalised to 100 for the month. This choice is consistent with many key macroeconomic variables using 2004-05 as their base year.

Determining the weights of Index components: The ABIX is constructed from the above five indicators using principal component analysis (PCA), a standard statistical technique used to reduce the dimensionality of a dataset. In the ABIX, the inputs for PCA are the index series for the five series above. The series are normalized by subtracting the sample mean and dividing by the standard deviation prior to conducting the PCA. The output from the analysis is a single indicator - the ABIX - that is a weighted average of those scores. The weights are chosen to maximize the percentage of variation in the original five components of the ABIX.

Although the overall explanatory power of the PCA is relatively weak, in comparison with norms for such series, we will be attempting to improve performance as the data sets become more robust over time. We have also simulated the effects on the ABIX of various weight combinations, to reflect the rather wide confidence intervals of the component series. These simulations show that the ABIX remains relatively robust to the weighting changes.

To construct the index, normalised scores for each of the component indicators are multiplied by their component loading in the table below and then summed. The component loadings represent the weight accorded to each of the indicators in constructing the index.

Adjusting for inflation
Integrating data across different time scales requires scaling down some components of the infrastructure index in terms of real prices. Fund flows, Capex project costs have been adjusted for inflation using the new WPI (2004-05 prices).