Budget 2016-17 to impact infra stakeholders to different degrees

The Union budget has often been used for big bang announcements of infra policy, or for including lists of new infrastructure projects. That this Budget does neither, and largely limits itself to taxation and expenditure, need not be seen as a shortcoming. Several measures are under way in various line ministries, such as projects under the Sagarmala port development program, financing of Smart Cities and Atal Mission for Rejuvenation and Urban Transformation (AMRUT), and the Hybrid Annuity Model for National Highways. The budget announcements supplement these, and are likely to impact different infrastructure stakeholders to different degrees.

Construction companies were already seeing an upswing in their order books, and the increased spending on roads, railways and irrigation will continue this trend. Increased rural spending may have a marginal impact on large construction companies, if these contracts are more suited for local players. The inland waterways sector had been expected to received a larger allocation than the ₹ 800 crore it got (which includes port projects also).

For infrastructure owners and operators, addressing stressed assets remains a priority over pursuing new projects. Towards this, the proposals to announce guidelines for renegotiation of public-private partnerships (PPPs) and the Resolution of Disputes Bill are critical. The report of the committee headed by former finance secretary Vijay Kelkar contains detailed recommendations on the constitution of the Infrastructure PPP Review Committee, as also proposed scope and considerations for renegotiations. Early formalization of these is necessary.

Several other recommendations are critical to addressing concerns of private investors, and the budget was expected to be the forum for formalizing them. These include measures like PPP Project SPVs (special purpose vehicles) to not be audited by the Comptroller and Auditor General of India, amendments in Prevention of Corruption Act and setting up of a National Facilitation Committee.

A third proposal in the budget, with respect to private investment in public works projects, is to formulate a new credit rating system for infrastructure. Details of how this would be different from the current system are not available yet. Projects in early stages of construction are normally considered high risk by rating agencies, and one guess is that the intention is to address this, and hence increase bankability of early-stage projects. If this translates to much better prepared projects (in terms of plug-and-play readiness of land acquisition and clearances), that would obviously be a positive.

There has also been discussion on the government setting up a credit enhancement mechanism, which would also help. However, any attempt by the government to influence the credit rating methodology itself may not be attractive to the lending community.

On the financing side, recapitalization of banks is required to enable them to start lending to new PPPs. While the inadequacy of ₹ 25,000 crore in capital infusion potentially delays growth in private investment, from a longer term perspective, it keeps the focus on carefully resolving stressed assets, and avoids a blanket forget-the-past.

There are important lessons to be learnt from the over-leveraging experience of PPP investors. Also, more details of the National Infrastructure Investment Fund (NIIF) were expected in this budget. How the NIIF would complement the infrastructure financing system will hopefully be clarified subsequently.

For the line ministries and state governments, absence of large-scale private investment to back high-risk new projects is a challenge. In addition to use of lower-risk models like hybrid annuity, the more innovative ones could sell/securitize existing assets and cash-flows, as has also been recommended by the Kelkar committee. There is significant potential for efficiency improvement in public operations of infrastructure assets through PPP models. In the airport sector, for example, inducting private sector into Airports Authority of India (AAI) airports continues to be postponed. The model proposed in the budget, of the centre and state governments developing regional airports, can be made more effective by bringing private sector capabilities into the operations phase.

There is similar potential in several metro rail projects being developed through multilateral funding, and which will require significant capacity building in new agencies. Tax incentives for these, such as exemption of service tax on operation and maintenance contracts, could have been a useful nudge in this direction. The sunset of Section 80IA exemption, and it being replaced with investment-linked deductions under Section 35AD, will have a negative impact on new projects, leading to either higher annuity quotes, or in case of user-charge based projects, making marginally attractive projects unviable. However, this change was along expected lines, and hopefully better-prepared projects will enable efficiency gains to override the impact.

Manish Agarwal is partner and leader–infrastructure at PwC India.