Impact of Post-pandemic Budget on Private Investments in Indian Infrastructure

Cr�dito: Pineapple_Studio / Envato Elements

Access to Long Term Capital

An important theme of the budget is the emphasis put on access to long term capital. The Union Government has promised relaxation of criteria for sovereign and pension funds to avail tax benefits from their investments in infrastructure and have made efforts to ensure that InvIT platforms are more accessible to investors.

The Union Government has also introduced a new DFI as a measure to support infrastructure financing. The approach taken in this regard is in consideration of issues in the Indian banking system and areas of stress within the infrastructure sector. The success of the DFI will depend on the strength of the corporate bond markets and whether these markets can support increased infrastructure financing. The Union Government has proposed a corpus of INR 20,000 Crores ($2.7 Billion) for the new DFI to support infrastructure financing and to capitalize the institutions. The Union Government further aims to have a lending portfolio for DFI of at least INR 5,00,000 Crores ($ 69 billion) in three years. A lending portfolio of such size is a good starting point to endorse infrastructure financing.

Certain sectors such as roads, airports, gas pipelines, commercial utilisation of land belonging to PSUs etc. have been identified for monetization. The method of such monetization has not been determined and has been left to the discretion of specific ministries. The ministries may, at their discretion, choose from the InvIT route, the sales route or existing monetization routes such as ToT (toll, operate, transfer). The Union Government�s approach towards asset monetization is largely comprehensive and considers all possible routes to ascertain the most beneficial route for each sector. The asset monetization pipeline will create massive opportunities for greenfield and brownfield investments in the future.

If one were to consider the present flagship monetization efforts, neither the Power Grid Corporation of India (PGCIL) nor the National Highway Authority of India (NHAI) face issues of being underfunded. These entities do not require asset monetization and are divesting assets only to build into the story of successful monetization. Alternatively, InvITs aimed at State Government run transmission assets would make a considerable difference bearing in mind the issues surrounding state financing, financing of the distribution companies (DISCOMS) and recycling of capital in such sectors. Further, even if the justification for the NHAI InvIT is that it requires further capital, under the InvIT structure there is a lock-in of three years, which would mean that the capital would not be available for NHAI�s development activities in lock-in period.

At the same time, it needs to be acknowledged that these initiatives highlight that the strategic intent of the Union Government is that it would hold only key public assets (such as nuclear power plants) and offload assets which can be more efficiently run privately (such as roads and transmission assets). As public sector undertakings (PSU) have been holding these assets for many years, even with its deficiencies, a strategic plan for monetization will increase investor confidence.

Despite the opposing views, there is cause for concern that still remains. The Union Government must allow PSUs to reclaim the resources from asset monetization instead of it going to the consolidated fund of India. In the absence of that, there is no incentive for PSUs to present their best assets for monetization, which is necessary to reduce India�s infrastructure deficit.

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Reforms in the Power Distribution Sector

Many reforms have been proposed in the distribution sector, such as the proposed amendment to the Electricity Act, 2003. In the Budget, the attention has been on power distribution and not power generation. The question that arises is whether the reduced coverage of power generation in the budget reflects the view that power generation may stand on its own and distribution is more of a priority presently.

Such a move by the Union Government appears to be a strategic one, considering that in the past, reforms and amendments have not been implemented as State Governments were not on board with those reforms. The Union Government has linked such reforms to the funding incentives to Discoms. The design of the reform is detailed as the funding comes with conditions. There are four conditionalities in tranche one itself and tranche two has one strong conditionality. This is likely to encourage State Governments to action reforms and accept amendments to the Electricity Act, 2003, which would be a positive change in the power sector.

One of the few concerns that remain is that while the competition in power distribution and licensing in the power distribution sector is a positive step however, unless power distribution is cost reflective, it is not beneficial. As per the most recent PFC report, there is a loss of INR 72 paise (less than a ent) per power unit sold in India. Though the aggregate technical and commercial losses (AT&C) are less, it still has to be more cost reflective for DISCOMS to feel the benefits of such initiatives. Further, allowing open access, such as in the telecom sector would be the next step. In such situations, the consumer will go to the more efficient provider, which shall invariably be in the private sector. Public sector Discoms will, however, suffer under this model in the long run.

On the generation side, the only significant announcement was the further capitalization of Solar Energy Corporation of India (SECI) and Indian Renewable Energy Development Agency Limited (IREDA), which shall help the renewable energy sector.

Increase in budgetary allowance on capital expenditure

There has been a large increase in budgetary allowance for capital expenditure coupled with a discussion on a roadmap of rapid implementation of projects. These capex announcements are an extremely vital part of the budget. The budget has created positive ripples in the stock market which has given major thumbs up on capital deployment and capital spending. Capital expenditure is expected to expedite growth in GDP and is a faster way to the USD 5 trillion vision of the Indian economy. In addition, growth and thrust on the employment sector shall also lead to increase in income level and as a result, the GDP.

Despite the positive benefits, a few areas of caution still remain. Implementation of increased capex remains a challenge and raises the issue of efficiency of capital deployed. There is also a need to incentivize banks to lend and create viable structures for the private sector to participate.

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Industry suggestions

While short term measures may see quick returns, such measures are often at the expense of long term measures, which may be better for the market. For example, a smaller ToT in a shorter time shall crowd out investors in the long run. Hence, the implementation of long term measures has to be carried out in a focused manner, and it is expected that the Union Government will deploy a fair amount of resources to ensure proper implementation of this budget. Further efforts can be made by the Union Government to simplify certain aspects of the budget that have not been addressed adequately. For instance, in case of wholesale price index (WPI) in a road project, the investor has to determine WPI for thirty years. The Union Government may consider the introduction of a model to determine a standard WPI and leave the rest to be decided upfront, which would simplify the process and make it more investor friendly.

From a regulatory perspective, there are persisting issues surrounding sanctity of contracts. Discoms have not been privatized at state level, other than in small pockets such as Daman and Diu. Further, the Union Government will have a debt funding program as part of the capex reforms and shall include Government bonds indirectly subscribed to by investors. This shall lead to increase in interest rates due to large deployment, resulting in crowding out of capital. As it is difficult to control interest rates in the free market, the Reserve Bank of India has been struggling as well with this matter. It will be beneficial for the Union Government to consider further methods to raise capital. Small investor participation is important as they are looking at structures where they can deploy capital and receive interest rates ranging from 4% to 5%. InvITs have been steady, predictable and transparent, and more structures of similar nature are required.

Lastly, the dispute resolution process has become extremely complicated due to the presence of multiple forums to reduce the number of cases being decided by such courts. Further simplification and expedition of the dispute resolution process is crucial for quick resolution of disputes, which in turn shall incentivize investors to enter the investment market in India.

While the budget is encouraging and has generated momentum in the market, however, the true impact of the budget can only be determined post project wise implementation

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