By Arindam Guha
With an envisaged investment of more than INR 100 lakh crore in infrastructure until 2025, infrastructure development continues to play a key role in achieving the country’s economic aspirations. Per the NIP, sectors such as roads (about 20 percent of the total investments); urban and housing (16 percent), railways (14 percent); conventional power (12 percent); and renewable energy (9 percent) are likely to account for over 70 percent of the total investments. In terms of financing, the contribution of the central and state governments has been estimated at 39 percent each, with the balance 22 percent coming from the private sector. However, the mix varies widely by sector. For example, the central government’s share is estimated at more than 85 percent in a sector such as railways, with the balance representing private-sector financing. On the other hand, in the urban and housing sector, the state government’s share is estimated at over 60 percent, with the central government’s share being about 30 percent and the balance coming from the private sector. In sectors such as renewables where tariff-based bidding has become the established practice, almost 100 percent investments are expected from private-sector developers.
In terms of phasing of investments, about 14 percent is expected in 2019−20, followed by 20 percent in FY 21, 19 percent in FY 22, 14 percent in FY 23, 13 percent in FY 24, and 11 percent in FY 25. The expected outlay in infrastructure development in 2020−21 is about INR 20 lakh crore. The Annual Budget 2019−20 saw an allocation of about INR 5 lakh crore towards infrastructure development across the sectors covered in the NIP. Even if the outlay increases by 20 percent in 2020−21, as estimated by the NIP, the balance aggregating to about INR 14 lakh crore would need to be mobilised by the state/local governments and the private sector. Some of the key issues that need to be considered from this perspective are mentioned below:
With state/local government agencies playing an important role in mobilising finance for infrastructure development, given their existing fiscal and financial constraints, suitable measures for credit enhancement will need to be put in place
Reducing dependence on bank financing and attracting long-term sources, such as pension, insurance, and sovereign wealth funds, to address issues of asset liability mismatches and increased default risk for financing agencies
Inadequate depth of the infrastructure and municipal bond markets affects the ability of infrastructure companies to raise resources due to various factors, such as regulations limiting investments from pension funds/insurance companies to instruments with a rating of AA or above, lower-than-optimal credit rating for a large proportion of infrastructure instruments available in the market (particularly during the initial stages of the project), etc. Some initial measures have already been taken. One such measure is the November 2018 SEBI directive to large corporates to fund at least 25 percent of their borrowings through the corporate bond market with effect from FY 19−20.
To address the above issues, the forthcoming Budget 2020−21 may consider the following:
Operationalising the proposed Credit Guarantee Enhancement Corporation announced previous year to augment credit guarantee facilities currently provided by IIFCL and others
Putting in place a centrally sponsored scheme for the joint financing of infrastructure projects by central/state/local government agencies and the private sector; as pooling and monetisation of assets/land would be critical, the central government financing could be made conditional on such arrangements being implemented, supported by innovative instruments using land value capture and escrowing receivables from industrial/commercial consumers; suitable guidelines and templates for prioritising projects, feasibility assessment, bidding procedures, terms of contract/concession for individual sectors, etc., would also need to be specified as part of the scheme
Reviewing existing guidelines around investments by insurance companies, pension funds, and other long-term investors in infrastructure-related instruments and financing vehicles, such as infrastructure investment trusts and municipal/corporate bonds
Strengthening and/or institutionalising a credible regulatory mechanism to determine tariff and subsidy policy based on cost of services; notifying and monitoring service levels, dispute resolution, etc., for sectors such as railways and water, to provide comfort to potential private investors
Notifying guidelines/principles to renegotiate contracts and alternate dispute resolution mechanisms
Providing direct tax concessions to investors in infrastructure-related special purpose vehicles/financing vehicles, allowing set off of losses in one entity with profits in another, subject to specific conditions on reinvestment part of those profits in the infrastructure sector
(The author is Partner, Deloitte India)
