Attracting Private Investments in Infrastructure

26 Jan 2020

The infrastructure sector is one of the key drivers of the Indian economy. The overall development of the overall infrastructure sector, which comprises key verticals like power, bridges, dams, roads, urban infrastructure etc, is a strong indicator of the overall development of the nation.

The government envisages an infrastructure spend of INR 102 lakh crores over five years starting in 2019-20 and extending across 23 sectors. The private sector is expected to contribute 22% to the total spend.  This calls for strong collaborative efforts between the private sector and the Government.

CII, in order to drive the infrastructure agenda, has provided policy recommendations for the upcoming Union Budget. Some of these include:

The Government could consider awarding projects to the private sector only after securing key sovereign clearances. This is especially true for big infrastructure projects, such as power plants, airports and roads. It will help to avoid project delays and cost run overs.
Financing infrastructure: Infrastructure projects require long term financing and specialised project evaluation expertise. However, there are some challenges. The bulk of the funds available to banks are short term in nature, therefore lending for long term creates asset liability mismatch for banks.

Long term infrastructure funding would need specialised expertise, different from that of working capital or collateral based lending, which the banks have traditionally been undertaking.

Development Finance Institutions (DFIs) have played a key role in providing long term funding for industrial and agricultural infrastructure in India. In last year’s Budget, the Government had announced setting up of an expert committee to study the current situation relating to long term finance and also India’s past experience with development finance institutions, and recommend the structure and required flow of funds through such institutions.

This year, the government could consider a concrete plan to operationalise the setting up of a large DFI for providing long term funding to industry and infrastructure.

The DFI could raise cheap international long-term capital, which may have an inclination for funding Indian infrastructure. For example, the Government of Japan has agreed to give a soft loan of INR 90,000 crores at 0.1 per cent interest rate, repayable over 50 years, for the bullet train project.

The Bond Factor – CII recommends that a separate categorization of bonds be created for infrastructure financing.

The bond market can provide a long tenor, fixed rate financing for companies in the infrastructure space. Many infrastructure companies, due to their low credit ratings combined with other factors, are not able to always access bond markets on their own. A significant part of the funding happens through financing entities.

Such infra linked issuances can come from infrastructure debt funds (IDF-NBFCs) and from long term infrastructure and affordable-housing bonds issued by banks.

In order to facilitate infrastructure financing through bond markets, the Government could look at announcing a separate exemption limit for mutual funds towards exposure to bonds, issued by companies engaged in infrastructure activities.

The Government under Secretary, Department of Economic Affairs, has set up a task force to identify projects to be taken up under the proposed INR 102 lakh infra spend over a five year period. These projects could be converted into a shelf of bankable projects to help attract both foreign and domestic investments.  
CII suggests the creation of “India Infrastructure – INR 500 billion Credit Guarantee and Low Interest Long Tenure Government Loan Scheme” by leveraging Government’s budgetary resources.
The Government could look at allowing both public and private infrastructure companies to issue tradable zero coupon, long-term tax-free infrastructure bonds based on strict credit rating criteria by bringing an amendment to Section 10, Clause 15 (iv) (h) of the Income Tax Act.

India’s infrastructure sector is set for huge expansion in the coming five years and Budget 2020-21 would establish a strong foundation for its quick and smooth implementation.

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