Budget 2019: Govt’s planned infra boost calls for overhaul, say analysts

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Updated: July 15, 2019 6:23:03 AM

Union Budget 2019: The need to revisit infrastructure financing options before the country was a common thread in the maiden Union Budget 2019 presented by finance minister Nirmala Sitharaman and her predecessor Arun Jaitley’s first Budget presented in July 2014.

Budget 2019, Budget 2019 india, union Budget 2019,   PPP model, Infrastructure, infra news, nirmala sitharamanBudget 2019-20: To be sure, PPP is not a new idea for India. In mid-1990s, the Indian Railways had invited private funds for over-gauge conversion of over 15 railway tracks.

Budget 2019 India: Unless the government implements key changes in the PPP model to rope in the private investors, including those with deep pocket like global pension funds — the recommendations of the Kelkar Committee are a strong grounding to work upon — the Budget promise to scale up infrastructure investments to Rs 20 lakh a year could remain a pipe dream, analysts said.

To leverage financing and improve operational efficiencies, involvement of the private sector is the key. So, model PPP contract agreements need to be rewritten to allow optimal risk allocation among all stakeholders and renegotiations during the tenure of the concession agreement with full disclosure of the revised costs, risks and benefits, they added.

The need to revisit infrastructure financing options before the country was a common thread in the maiden Union Budget 2019 presented by finance minister Nirmala Sitharaman and her predecessor Arun Jaitley’s first Budget presented in July 2014.

While Sitharaman stressed the need for private participation to fulfil the requirement of Rs 100-lakh-crore investment needed for infrastructure development over the next five years — she also spoke about Rs 50-lakh-crore investments in the railway sector  between 2018 and 2030 —Jaitley had unveiled a plan to set up an institution called 3P India with a corpus of Rs 500 crore. (3P India hasn’t seen the light of the day).

Budget 2019, Budget 2019 india, union Budget 2019,   PPP model, Infrastructure, infra news, nirmala sitharaman

“India has emerged as the largest PPP market in the world with over 900 projects in various stages of development. PPPs have delivered some of the iconic infrastructure like airports, ports and highways, which are seen as models for development globally. But 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 quick dispute redressal mechanism,” Jaitley had said in his speech.

To be sure, PPP is not a new idea for India. In mid-1990s, the Indian Railways had invited private funds for over-gauge conversion of over 15 railway tracks. No private player came forward. More recently, the ambitious station redevelopment programme for 600 stations has come a cropper.

In fact, the share of private investors in India’s infrastructure funding has been on the decline in recent years. For 2019-20, the PPP component of the extra budgetary resources (EBR) — which has increasingly become the mainstay of the railway capex — is projected to be 33%. The share of PPP in railways’ EBR in 2016-17 was 51%.

In the roads sector, as per a report by rating agency Icra Ltd, the National Highways Authority of India’s (NHAI) debt has risen from Rs 25,000 crore in 2014-15 to an estimated Rs 1.7 lakh crore in 2018-19 mostly because land acquisition costs have been rising. This is also because the focus on fully publicly funded engineering, procurement, construction (EPC) projects have resulted in significant increase in expenditure.

The hybrid annuity model (HAM) also warrants higher financial participation by the government through the project’s construction phase. Under HAM, 124 projects have been awarded till date, of which 105 have achieved financial closure. Under HAM, the government contributes 40% of the project cost in phases throughout the construction period and incentivises banks by lowering risks and other favourable clauses.

As far as the railways sector is concerned, expert panels have suggested that the private operators be allowed to run trains by paying track access charges to the Indian Railways.  In the port sector, the archaic TAMP regulations and the Major Port Trusts Act have been impediments. The PPP model in the port sector had also faced hurdles like the high revenue share for the port trusts.

While the PPP route is significant to ramp up the pace of infrastructure growth though lenders have become cautious due to rising non-performing assets, experts believe the government needs to change its approach. “Recommendations to accelerate PPPs are already made. All we need to do is to set the stage for time-bound execution of the recommendations,” said Vinayak Chatterjee, chairman, Feedback Infra.

One of the suggestions made by the Kelkar Committee was to set up independent regulators in sectors that go for PPP. However, sectors such as railways and roads have no regulators. “Regulators are required in these sectors to mitigate future uncertainties for both parties. Unless private players get the confidence that there will be a third-party adjucator in case of disputes, they are unlikely to be forthcoming,” according to Vishwas Udgirkar, partner, Deloitte in India.

One of the other important observations made by the Committee was equitable allocation of risk across stakeholders and a framework to cover all aspects of a project’s lifecycle. “The assumption in the past has been to transfer the risk to private players which has not worked. The private sector made assumptions that it will be able to manage risk but have failed,” said Arvind Mahajan, partner and head of energy, infrastructure and government services, KPMG India.

The toll operate transfer model in the highway sector met with success in the first round but the second round of auction floundered. The model could still be tried in a big way for stretches that might attract foreign investors with deep pockets like global pension funds. Such asset recycling models (monetisation) could be employed in other sectors too.

Given the long life of infrastructure projects, two-thirds of PPP projects across the world get renegotiated. However, given the continuous scrutiny in India, the government is reluctant to renegotiate, Mahajan added.

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