The road to growth

Written by fe Bureau | Updated: Jul 11 2014, 14:14pm hrs
Infrastructure got a big boost in the Modi governments maiden Union Budget on Thursday with an allocation of around R62,000 crore and more than a mention for every segment, be it roads, ports or airports. Not only did the finance minister earmark generous amounts for roads and smart cities, he created a brand new entitythe 3P fund with a corpus of R500 croreto ensure that projects taken up in the public-private partnership (PPP) mode dont get derailed. The biggest beneficiary was the roads sector, which walked away with a proposed investment of R37,880 crore to be housed in the National Highways Authority of India (NHAI), which will target 8,500 km of construction this year.

The finance minister also addressed the issues relating to the financing needs of the sector, permitting banks to raise long-term bonds with minimum statutory reserve requirementsCRR and SLRthat would bring down the cost of funds. I feel the proposed move to provide exemptions to banks from CRR and SLR obligations by linking those to long-term infrastructure loans will help in mobilising funds through issue of infrastructure bonds, the FM observed in his speech. He also announced a more flexible structure for infra loans. Long term financing for infrastructure has been a major constraint in encouraging larger private sector participation in this sector. Banks will be encouraged to extend long-term loans to the infrastructure sector with flexible structuring to absorb potential adverse contingencies, sometimes known as the 5/25 structure, he said. For the first time, the finance minister introduced a modified REIT-type structure for infrastructure projects, called Infrastructure Investment Trusts (InvITs), which would have a similar tax-efficient pass-through status for PPP and other infrastructure projects.

Hemant Kanoria, chairman and managing director, Srei Infrastructure Finance Ltd, feels the proposed Infrastructure Investment Funds on the lines of Real Estate Investment Funds is another positive step. We have been advocating for allowing tax pass-through for such funds for quite some time. This will help mobilise more funds for infrastructure from both India and abroad, he said.

JP Chalasani, managing director and group CEO, Punj Lloyd, said the future looked promising for EPC companies. The governments plans to invest large amounts in the oil and gas sector, roads and highways, airports, harbours and ports will offer sufficient opportunities to players in this industry, Chalasani told FE.

Several companies, such as IRB Infrastructure Developers, Ashoka Buildcon and Sadbhav Engineering, have been participating in the development of roads, some via the PPP mode, but some of the projects have run into trouble. The government hopes to resolve some of these issues. Sujjain Talwar, partner, Economic Laws Practice (ELP), pointed out that an overhaul of the current PPP structure and the documentation surrounding it needed to be carefully looked into. Whether 3P will act as a regulator or a dispute redressal mechanism is yet to be seen, Talwar observed.

Finance minister Arun Jaitley observed that while India had emerged as the largest PPP market in the world with over 900 projects in various stages of development, there were problems with the current framework. We have also seen the weaknesses of the PPP framework, the rigidities in contractual arrangements, the need to develop more nuanced and sophisticated models of contracting and develop a quick dispute redressal mechanism, he said.

The government also plans to initiate work on select expressways together with the industrial corridors, for which NHAI shall set aside a sum of R500 crore. The ports and shipping sector, which also found a mention in the Budget, will see action; apart from plans to award 16 new port projects this year, an amount of R11,635 crore will be allocated for the development of Outer Harbour Project in Tuticorin.

Samir Kanabar, tax partner (infrastructure practice), EY, believes this is a good move as Indian ports are choked at the moment with capacity utilisation at a high 80-90% compared to international markets, where it is in the range of 70%. There is, however, a gestation period of two-three years, so it will be sometime before this additional port capacity becomes operational, Kanabar told FE. Players like Adani Ports & SEZ and Essar Ports in the private sector could take advantage of this addition.

The government will also focus on the development of inland waterways, a long-standing demand of industry given it is the most cost-effective way to transport goods. The Jal Marg Vikas project on the river Ganga under National Waterways-I will be developed between Allahabad and Haldia at an estimated cost of R4,200 crore.

The highways sector has hit a low; after a dismal show in 2012-13, the ministry had scaled down its projects award target by nearly half to 5,000 km in 2013-14, compared to a target of 9,500 km in 2012-13 and awarded less than 2,000 km in 2013-14. In 2012-13, the ministry was barely able to award 15% of the targeted 9,500 km of highways on account of a number of factors, including delays in clearances and a shortage of equity with developers. The allocation includes R3,000 crore in the north-east to improve connectivity. Roads and highway minister Nitin Gadkari feels that to speed up the implementation of highway projects, the ministry should be able to award projects of R1,000 crore investment on its own, for which it has asked Prime Minister Narendra Modi. Many projects in the past have been delayed due to a number of committee approvals required for their implementation, Gadkari said, adding the ministry has so far cleared R40,000 crore worth of projects that were stuck for want of clearances.

New airports will be developed in Tier I and II cities and towns across the country by Airport Authority of India (AAI) or via the public-private-partnership (PPP) model. Despite increase in air connectivity, air travel is still out of reach of a large number of aspirational Indians, the finance minister said.