Infrastructure-driven economic revival laudable but strewn with multiple challenges

The government has placed large bets on infrastructure to revive the battered economy. In fact, infrastructure occupies a place of pride in the recent Union Budget 2021-22. The Budget is looking to spruce up infrastructure sector by earmarking a whopping Rs 5,54,000 crore for capital expenditure (capex) in FY22.

The capex for FY22 represents a massive 34.46 per cent jump over that of the FY21 Budget estimate (BE). The huge capex is set to provide a major leg-up for cement, steel and other core sectors, create jobs and kick-start the ailing economy.

At Rs 1,18,000 crore, the Ministry of Road Transport and Highways has got the highest-ever allocation, according to Union Finance Minister Nirmala Sitharaman. The government will be awarding around 8,500 km of road projects and an additional 11,000 km of national highway corridors by March 2022. Besides, poll-bound West Bengal, Assam, Tamil Nadu and Kerala have got highway projects worth over Rs 2,27,000 crore.

The Indian Railways has got a big boost with Rs 1,10,000 crore allotted in the Union Budget for the national transporter. Of the Rs 1,10,000 crore allocated for Indian Railways, a lion’s share of Rs 1,07,000 crore is reserved for capex. There is also a provision of Rs 40,000 crore for upgrading rural infrastructure.

The Union Budget intends to introduce competition in the power distribution segment by enabling electricity connection portability for consumers. The finance minister has revealed that this would be achieved by amending the Electricity Act, 2003. The Budget has also proposed a scheme with an outlay of Rs 3,05,982 crore spread over five years to revive the distressed State power distribution companies (discoms). The reforms-based, results-linked scheme will provide assistance to discoms for infrastructure creation, inclusion of pre-paid smart metering, feeder separation and upgrade of systems, among others.

There is good news for affordable housing segment, with the Union Budget proposing to extend Income Tax exemption of Rs 1,50,000 for purchase of affordable houses by another year up to March 31, 2022. This exemption is available for buyers of affordable houses over and above the tax exemption provided for purchasing houses in other segments. The Budget has also proposed an extension of a tax holiday for builders of affordable housing projects by another year up to March 31, 2022.

Raising funds

Finance Minister Nirmala Sitharaman: The Union Budget 2021-22 has sought to provide a bigger playing field to foreign capital in the field of infrastructure. The government is also tweaking taxation policy to encourage investments in InVITs and real estate investment trusts (REITs).

The huge capex, unveiled by the Union Budget, promises to recharge the flailing economy. But raising the resources to meet this capex is a bigger challenge. Interestingly, in her recent Union Budget, the finance minister has outlined the manner in which the resources would be raised.

A mix of old and new methods will be deployed to mop up the funds to finance infrastructure projects. The Budget indeed attempts to revive the old concept of a development finance institution (DFI), an idea that India had tried in the pre-reforms era and then given up. The proposed DFI will begin with a Budgetary allocation of a mere Rs 20,000 crore. The initial capital will then be leveraged and raised to Rs 5,00,000 crore in three years. It is here that the old idea of a DFI meets a new one, with the leverage looking up to the private sector to fill in the targeted capital of Rs 5,00,000 crore in three years.

Many experts point out that banks are not the best-suited institutions to lend to infrastructure projects. This is because infrastructure projects take a long time to break even, while banks deal mostly with short-term deposits. Experts call this an asset-liability mismatch. It is in this context that the taps into the old idea of recreating a DFI framework. The Budget then goes on and fuses the new concept. It envisions an unprecedented expansion in scope for private sector activity in infrastructure through the DFI.

“The setting up of a DFI will help draw long-term funds for meeting investment requirements of the infrastructure sector. We do hope that going ahead, the government will look at expanding the remit of the proposed DFI to financing sectors other than infrastructure,” notes FICCI President Uday Shankar.

Another potential game-changer in the recent Union Budget is the major thrust laid on asset monetisation. In fact, asset monetisation is seen as a major funding option, where existing assets or operational infrastructure projects will be used to raise funds, and the funds will be deployed in new infrastructure projects. Ms Sitharaman has revealed that the government will come up with an asset monetisation dashboard, which will be launched soon to keep track of monetisation in various sectors. Besides, a national monetisation pipeline will also be developed to speed up the process.

National Highways Authority of India (NHAI) – a pioneer of asset monetisation, NHAI has been raising funds by selling off its highway projects – and Power Grid Corporation of India (PGCIL) have sponsored an infrastructure investment trust (InvITs) each that will attract international and domestic institutional investors. Five operational roads with an estimated enterprise value of Rs 5,000 crore are being transferred to the NHAI InvIT. Similarly, transmission assets worth Rs 7,000 crore will be transferred to the PGCIL InvIT.

Meanwhile, Indian Oil Corporation (IOCL) is mulling to sell stakes in one or two of its vast network of crude oil and petroleum product pipelines in the country under the asset monetisation plan. Gas Authority of India (GAIL) too is planning to launch an InvIT of its two gas pipelines – the Dahej-Uran-Panvel-Dabhol pipeline and Dabhol-Bengaluru pipeline – which will be used for asset monetisation.

The government is also tweaking taxation policy to encourage investments in InVITs and real estate investment trusts (REITs). The Union Budget 2021-22 has sought to provide a bigger playing field to foreign capital in the field of infrastructure. It has proposed to make amendments to relevant legislation to allow investment by foreign portfolio investors (FPIs) in InVITs and REITs. The Budget has also exempted tax on dividends of REITs and InvITs to make such investment vehicles attractive and lucrative for investors.

“The proposal of providing FPIs an entry into debt financing of REITs and InvITs will open up a large source of fresh funding for the infrastructure and real estate sectors. This will also open up a new avenue for FPIs to invest in a growing market like India,” notes Manoj Purohit, a partner and leader (financial services tax) of BDO India.

InvITs (for infrastructure projects) and REITs (for real estate projects) are like mutual funds, which enable direct investment of money into them from individuals and institutional investors. The trusts that govern InvITs and REITs use such money collected in further development of infrastructure and real estate projects. Besides, the trusts repay their investors from the income accruing from these projects – such as toll for highways in InvITs and rent for commercial real estate in REITs.

Taking the idea of asset monetisation further, the Union Budget has proposed to monetise State-owned airports and ports. It has added that Airports Authority of India (AAI) would monetise airports in tier-II and -III cities. The finance minister has also announced that seven port projects worth more than Rs 2,000 crore will be put under public-private partnership (PPP) mode.

Roadblocks ahead

After a little over a year since the launch of Rs 100,00,000 crore National Infrastructure Pipeline (NIP), around 217 projects worth Rs 1,10,000 crore have been completed and about 1,800 projects are under various stages of development.

A big thrust on infrastructure in the Union Budget seeks to revive the economy that is in recession and is set to contract by over 7 per cent in FY21. Besides, the government had launched the National Infrastructure Pipeline (NIP) – a compendium of over 7,400 projects worth over Rs 100,00,000 crore – in December 2019 to roll out projects at a greater pace. After a little over a year since the launch of NIP, around 217 projects worth Rs 1,10,000 crore have been completed and about 1,800 projects are under various stages of development.

The pace of completion of these projects is certainly laudable. But the scale of investments required to get the NIP rolling is rather overwhelming, and the government’s funding alone cannot helm the mega projects. In the past, a major portion of spending on infrastructure projects has come from the private sector, which is in a very bad shape today. Besides, banks, sitting on a mounting pile of non-performing assets (NPAs), can hardly be expected to fund the NIP in a big way.

Besides, proceeds from disinvestment and sale of other assets, such as telecom spectrum, have rarely matched the target. It is here that the Union Budget’s extraordinary ideas for fund-raising – such as a DFI or large-scale asset monetisation – are set to provide a major leg-up for project financing.

However, getting these outstanding ideas to deliver is easier said than done. For instance, the proposed DFI, with an outlay of Rs 20,000 crore from the government, seeks to attract around Rs 5,00,000 crore from the private sector in three years. This proposition is rather challenging, given the dire financial condition of India Inc.

Moreover, asset monetisation or outright privatisation of State-owned entities is quite a daunting task. The government has decided to sell off two public sector banks (PSBs) and a State-owned general insurer. The intent is certainly bold and reformist. But the roadblocks to such a sale become quite evident if one were to look at trials and tribulations of Air India’s privatisation. Asset monetisation too would require skill and expertise to yield the desired results. And even when privatisation and asset monetisation do succeed, inflow of funds after completion of such deals may stretch over a period of time.

Funding, in the meantime, is not the only hurdle before the infrastructure sector. In India, projects tend to linger on for years together, leading to cost overruns of enormous proportions. Moreover, regulatory bottlenecks, inordinate delay in securing various clearances, land acquisition challenges and overdrawn litigation often end up holding back projects from completing on time.

Unending Woes Mar Project Development

- Infrastructure projects hobbled by regulatory bottlenecks, inordinate delay in clearances, land acquisition challenges and overdrawn litigation

- Expertise and deft execution key to success of asset monetisation

- Private sector funding support for proposed DFI a big question mark

- Lower proceeds from disinvestment and spectrum sale likely to dampen project funding

- Cash-strapped private sector and NPA-hit banks unable to finance projects

- Government funding woefully inadequate to helm over Rs 100,00,000-crore NIP projects

The Insolvency and Bankruptcy Code of 2016 (IBC) promised to be a boon to the infrastructure sector, which has a major share in the pile of stressed assets. However, the resolution process under the IBC has met with many roadblocks and delayed the resolution process. Problems of debt-ridden infrastructure projects have further aggravated with suspension of the resolution process under IBC in the wake of COVID-19. This, in turn, has forced banks to continue with a conservative approach in funding new infrastructure projects.

So, as the Narendra Modi government embarks on an ambitious infrastructure-driven economic recovery, it is likely to stumble on many fronts. Over the years, the government has introduced several measures to get projects on stream quickly. Enactment of the Commercial Courts Act, 2015 to aid quick disposal of commercial suits is yet to prove its efficacy. Besides, a national PPP policy, an independent regulator for PPP sectors and a separate mechanism for resolution of disputes related to public utility, among others, have all been proposed in the past but are yet to be implemented. A speedy implementation of these measures can, in fact, go a long way in ushering the infrastructure-led economic revival.

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