Budget 2021-22 needs to prioritise interventions which can act as a force multiplier for both state govt investments as well as long-term private and external sources of finance
Budget 2021-22: The second potential area for intervention involves setting up of a suitable mechanism to facilitate infrastructure asset monetisation, with a focus on State and city-level projects.
Indian Union Budget 2021-22: With the economy poised for a turnaround post Covid-19 and given the strong GDP multiplier effect of investments in infrastructure, there is a lot of attention on what the forthcoming Budget will offer in terms of infrastructure spend. If we look at 2020-21, budgetary spending on infrastructure development is expected to be around Rs 4.5 lakh crore. Even if this was to increase by 10% y-o-y over the next four years, the total budgetary spend during 2020-25 is likely to be 18-20% of the total National Infrastructure Pipeline (NIP) outlay of Rs 111 lakh crore.
This is in line with the financing mix envisaged by the NIP, wherein the two other main sources of finance are states’ budgetary spend (24-26% of total NIP outlay) and non-government/private sector financing (45-50%) provided by banks, infrastructure NBFCs, long-term investors like domestic and foreign pension funds (FPFs), sovereign wealth funds (SWFs), infrastructure investment trusts (InvITs), etc.
However, State Government-finances have always been constrained and have taken a further hit due to Covid-19, on account of a dip in revenues and increased healthcare spending. Private sector investments in infrastructure would also need a step change for NIP financing expectations to be met. The other concern has been of asset liability mismatch at banks and NBFCs (which have limited long-term financing sources), which have been the mainstay for funding long-term infrastructure projects. For ensuring the NIP is funded in a sustainable manner, it is important that Budget 2021-22 prioritises interventions which act as a force multiplier for both state government investments as well as long-term private/external sources of finance.
The first such area is the setting up of one or more Development Finance Institutions (DFIs) to finance greenfield infrastructure projects in select sectors.
As highlighted in the NIP, DFIs funded 20-25% of infrastructure investments during 2013-2018, with annual infrastructure spend in this period being in the range of Rs 7-12 lakh crore. DFI financing has been focused on specific sectors like power and railways, where institutions like PFC, IRFC, etc. have contributed around 40-50% of total investments. However, the number of DFIs at the state level has been limited. To address these issues, in addition to making allocations to support the existing DFIs, Budget 2021-22 can look at setting up one or more DFIs, focusing on high-impact sectors like urban infrastructure, health, education, etc. where project development responsibility is primarily with state and/or city governments and financing challenges have been higher.
While the initial risk capital for the DFI(s) can come from the Budget, this can be further leveraged through additional resources from bilateral/multilateral organisations, international capital markets, etc. A regional or state-specific DFI construct can also be explored, based on equity participation from state governments and backed by suitable governance arrangements and state-specific investment caps based on contribution from individual states.
The second potential area for intervention involves setting up of a suitable mechanism to facilitate infrastructure asset monetisation, with a focus on State and city-level projects. Budget 2021-22 can be used to contribute the initial capital to acquire completed projects generating revenues/having revenue potential, with additional funds being mobilised from external investors. The existing alternate investment fund (AIF) structure under the NIIF or the sector-specific InvITs being set up in the road, power sectors can be leveraged. New InvITs can also be considered with a focus on urban infrastructure, urban transport, etc. Suitable governance arrangements including appointment of professional investment managers would need to be put in place to attract external investors.
The third potential area which Budget 2021-22 can focus on is the extension of the existing credit guarantee facilities for infrastructure projects, either through the proposed Credit Guarantee Enhancement Corporation or any other similar entity. Although the corpus available with domestic pension funds and insurance firms is estimated at over Rs 50,000 crore, only a small proportion of this is currently deployed in infrastructure sector bonds, etc. as most instruments do not meet the threshold rating requirements needed for investment. Leveraging of enhanced credit guarantee provisions can play a key role in removing these investment bottlenecks, with a part of the expanded credit guarantee limits also being made available through the DFIs. Any additional budgetary contribution can be positioned as risk capital to mobilise additional resources from multilateral development agencies.
Finally, from a taxation perspective, while measures like exempting the dividend and capital gains income of SWFs and FPFs from infrastructure investments are already in place, the Budget can address some additional issues. Potential areas include extending the tax exemption u/s 10(23FE) to SWF/FPF investments in holding companies, as against only infrastructure operating companies; allowing the SWF/FPF availing the exemption to have a role in the governance of the investee entity; and extending the benefits under the section to other potential long-term infrastructure investors like private equity funds.
Together with the aforementioned measures, equally (if not more) critical would be underlying policy reforms for individual sectors, some of which have been highlighted in the NIP earlier. Key action points include putting in place objective regulatory & tariff setting mechanisms for specific sectors; streamlining land allotment, approvals, contract enforcement & renegotiation and dispute resolution practices for infrastructure projects; and deepening the market for corporate bonds while streamlining trading & settlement mechanisms.
A coordinated and time-bound implementation of these measures is likely to facilitate timely financing and implementation of the NIP, thereby enabling the country to achieve its overall economic development objectives.
The writer is Partner, Government & Public Services industry leader, Deloitte India