Monday, March 8, 2021

Long term finance and a bigger playing field for private sector to lead infra push

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The Narendra Modi government has set itself a target of creating a 111 lakh crore National Infrastructure Pipeline by 2025. The 2021-22 budget has deployed a mix of old and new to achieve this target.

This year’s budget has announced the creation of a Development Finance Institution (DFI), an idea India tried in the pre-reforms era before giving up. What is new is the unprecedented expansion in scope for private sector activity in infrastructure this budget proposes. If the ideas discussed in the budget are actually implemented, India might see more privately owned and operated roads, airports, railways, freight corridors, and ports.

Both these ideas are extremely important and potentially game-changing.

Let us take the idea of DFI first. Collapse of infrastructure projects, partly due to over optimistic revenue projections and partly because of courts cancelling resource allocations such as telecom spectrum and coal mines, played a big role in creating the bad loan crisis in Indian banks after the 2008 global financial crisis.

While it did not help that banks, especially the government-owned ones, had poor governance mechanisms and kept evergreening stressed loans so that they would not have to make extra provisioning to meet capital adequacy norms, many experts have pointed out that banks were not the best suited institutions to lend to infrastructure projects. This was because infrastructure projects take a long time to break even, while banks deal with mostly short-term deposits.

Experts call this an asset-liability mismatch. It is in this context that the discussion about recreating a DFI framework started doing the rounds. This budget has tried to tap into this sentiment. The fact that the proposed DFI will begin with a budgetary allocation of just 20,000 crore, suggests that the government wants to test the waters. It has set itself a modest target of building a portfolio of 5 lakh crore for this DFI in three years’ time.

The other potential game changer in the infra sector is the focus on asset monetisation.

The budget speech says that “monetizing operating public infrastructure assets is a very important financing option for new infrastructure construction” and has proposed that even existing infrastructure assets including those with National Highway Authority of India, Power Grid Corporation, freight corridors of railways, airports, and oil and gas pipelines will be a part of the asset monetisation programme. To be sure, the asset monetisation programme is being taken along with a sharp rise in capital expenditure allocation in 2021-22.

The budget proposes to award contracts for construction of 8,500km of roads by March 2022, and completion of an additional 11,000km of national highway corridors. Ambitious targets have also been set in railways, waterways and urban transport infrastructure including public buses and metro rail network.

The budget has also made an outlay of 3 lakh crore over the next five years towards reforms-based and results-linked power distribution sector scheme to address the viability crisis in power distribution companies

It also seeks to provide a bigger playing field to foreign capital in the field of infrastructure by proposing to make amendments to relevant legislations to allow debt financing of InVITs (infrastructure investment trusts) and REITs (real estate investment trusts) by foreign portfolio investors.

“The FY22 budget, by announcing the setting up a development finance institutions (DFI) with a corpus of 20,000 crore will go a long way in filling up the gap created by the demise of erstwhile DFIs namely Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India, and Industrial Development Bank of India. DFIs, unlike banks, besides bringing in the knowledge of project financing are known to have the patient capital suited for infrastructure financing. The debt financing of InVITs and REITs by foreign portfolio inflows and monetisation of operating public infrastructure assets are the right steps towards infrastructure financing,” said a note by India Ratings and Research.

To be sure, some have pointed to part of the infra-push as being driven by the upcoming assembly elections in five states. “The budget announced construction of roads in states going for elections, is there any motive behind it? Why not other states? It announced road projects of 625km in West Bengal, but the state government has already constructed 88,841km of rural roads in 10 years, which has been recognised by the Government of India,” said Amit Mitra finance minister of West Bengal.

Congress leader Rahul Gandhi took a dig at the government’s asset monetisation plan in a tweet criticising the Budget. “Forget putting cash in the hands of people, Modi Govt plans to handover India’s assets to his crony capitalist friends.”

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