For a growing economy like India, the infrastructure sector is one that will take the country far, if and only if, it gets the attention it deserves, the incentives and policies it needs and a dispute resolution mechanism that will truly make things easier and cost effective for all those involved in this sector.  

After securing a clear majority, expectations are high from the present Government, especially from Corporate India. The past few years have seen the pace of growth slowing down across businesses in India. Besides an all-engulfing slowdown, which had impacted the demand for goods and services, one major hurdle on the part of the previous Government was to serve as a catalyst in creating a growth-and-business-friendly environment. Under the regime of the previous Government, the situation demanded careful observations of the happenings around, assertive statements and corrective action plans – however, there were hardly any such initiatives around. 
Quite naturally, this was the status quo for a long time. In this, we have lost huge resources: time, money and future earnings, which provide hope and determination to work better and harder. And probably, the only sector, which got severely impacted due to the previous Government’s inactions, is India’s infrastructure sector. So, with the Modi-Government’s slogan of Acche Din,can India’s infrastructure sector get the attention due to it? Will the Government create an environment where issues related to execution of projects get the deserved resolution? It can.

The Story so far…

That India’s infrastructure is a growing child with high demands is a fact, which cannot be overemphasized.The sector remained engine for high GDP growth in the past and will need to perform again if the India needs to achieve high growth in coming days. . There have been instances where projects across sectors such as power, roads, and mining, among others, have been sanctioned and subsequently stalled, owing to multiple roadblocks. One common issue affecting the sector has been the delay and ambiguities in Government permits, clearances and procedures.

The revival of the sector now depends largely on initiatives taken on facilitating access to capital tailored for the sector and creating friendly policy framework

So what would these initiatives entail? 

a)

On the capital side

Debt capital availability to the sector has slowed down and needs incentives to kickstart. One of the most important steps the Government can take, is creating new Institutions solely dedicated to the infrastructure sector. Banks, which lend to infrastructure companies also provide retail loans for home, vehicle and other priority assets. Since infrastructure projects are capital intensive and have longer gestation periodit becomes difficult for Banks to manage the capital and risks resulting in additional burden on their balance sheets.The Banks also have product limitations ie they can mainly participate in term loans that are to mandatorily have monthly interest servicing, irrespective of the cash flow trajectories of infrastructure projects. This could a challenging task for infra projects that have long gestation period and could also have seasonality in revenue generation. . Most infrastructure goes through a steady ramp up in revenues which needs to be addressed through product structuring. This stresses the need for more new Institutions, which would finance infrastructure projects taking into consideration the long-gestation nature of projects. While we have newly instituted Infrastructure Debt Funds and infrastructure financing companies like IIFCL, there is still scope for more. Institutions like IREDA are bringing in lot of focus on renewable energy financing, a sunrise sector, although presently the overall power sector is going through difficult times. Infrastructure Debt Funds needs more regulatory encouragement and policy flexibilities to attract long term capital for infrastructure.

New infrastructure Institutions are required not only to address debt requirements but also equity & equity like instruments. Many International Institutions often funds both debt and equity for the same projects, a concept which could be encouraged locally for new Financial Institutions. This will allow the sponsors more access to project equity capital.

The Government needs to accord a‘special’ status to infrastructure funding. This would send a clear message that ‘infrastructure’ is not the priority of Banks but of the nation! The Government, in the Budget 2014, allowed Banks to raise infrastructure bonds, a forward moving step. Just like food and agriculture, the Government could consider infrastructure at par with priority sector lending for a limited period window; thus giving this sector the serious attention it needs.

The average capital outlay for an infrastructure project is significantly more than what is required for non-infra projects. The cost of capital for infrastructure companies must also be competitive for business viability. At present, the situation is quite ironical. Once a project commissioning is delayed or the revenue growth is slow usually the interest charge on the project goes up. This creates additional financial burden without immediate visibility of return

Infrastructure is a business of steady cashflows and it is imperative that Government establishes more Institutions, who understand the lifecycle cashflows in infrastructure assets and can offer a wide range of products beyond normal term loans

b)

On the policy side

As regards policies, there are a few key areas,where the Government needs to intervene and showcase its intentions of providing a business-friendly environment. Firstly, in order to bring in long term consistency in policy making the -Government could consider a separate Ministry for Infrastructure of cabinet status dealing with all aspects of broader infrastructure sector - regulatory framework, sectoral needs, environmental compliances, financing needs and inter-ministerial coordination for timely issuances of permits & clearances. There is a need to identify zones or locations where all clearances or permits required for infrastructure projects are made available upfront prior to any investments by private sector. This would save a lot of time and money for infrastructure companies.

Secondly, a focus on skill development in infrastructure sector. Infrastructure is a capital-intensive industry, where the involvement of labour is also high especially during implementation. Today, we have age old laws, which are applied across industries. These laws need amendments to focus on availability of skilled workers for the sector.

Thirdly, merely depending on demographic advantage is not sufficient. Creating infrastructure and more importantly maintaining the same is as human and technology intensive as it is capital intensive. Adequate efforts for training and educating the abundant human resource and making the technology more accessible to the manpower is a critical piece of the puzzle. Policy framework for employment generation (which is receiving increasing government attention) should go hand in hand with policy initiative for providing right kind of training for the employable population is the need of the hour.

Fourthly, we need an independent dispute resolution mechanism specifically for infrastructure projects to avoid any conflict of interest of the stakeholders. At present road sector has several disputes in claims & counterclaims which need speedy resolutions. A large number of infrastructure companies lose money, and time in resolving their disputes with the project awarding authorities.  Hence, an independent appellate body could ensure faster dispute resolution, quicker facilitation and proper decision-making.

Lastly, the Government needs to incentivize this sector through well thought out taxation policies. Several options such as previously practiced benefits under section 10(23G), differentiated taxations for IDF Mutual Funds and special tax breaks for infrastructure asset holding Companies need to be considered. Additionally, it is time for the Government to consider to allow matured infrastructure asset holding companies to access capital market with differentiated / tax free bonds to augment their additional resources for growth 

 

In conclusion
Infrastructure is a priority for an emerging economy like India. We need to stop thinking about infrastructure as an economic stimulant and start thinking about it as a strategy. Economic stimulants are short term measures – strategic investment in infrastructure createsa foundation for long term growth.


Sabyasachi Mukherjee

Sabyasachi Mukherjee spearheads the Project Debt Syndication vertical for IL&FS Financial Services Ltd. Over last 20 years, he has been spearheaded many high value debt syndication and debt capital market transactions across the sectors.


Disclaimer
Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

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