With the National Infrastructure Pipeline (NIP), which was published in December 2019 by the Department of Economic Affairs, Government of India, clearly specifying the quantum of infrastructure investments by sector as well as potential financing options, some priority action areas have also emerged as far as the forthcoming budget is concerned.
If we examine the NIP carefully, the top five sectors by investment are roads (estimated investment of Rs. 20 Lakh crores), urban & housing (Rs. 17 Lakh crores), railways (Rs. 14 Lakh crores), conventional power (Rs. 12 Lakh crores) and renewable energy (Rs. 9 Lakh crores). These together account for over 70% of the total envisaged investment of over Rs. 100 Lakh Crores by 2025. The relative share of financing between the Central Government, States and the private sector is expected to vary by sector depending on the administrative jurisdiction and relative maturity in attracting private participation. For example, the share of Central Government financing is envisaged to be over 80% in Railways as per the NIP, whereas it is only expected to be around 30% in a sector like urban and housing, with State Government contribution being over 60%. Similarly, share of private financing is expected to range from almost 100% in a sector like renewables where tariff based competitive bidding has been widely adopted to only around 10% in a sector like Railways, where public private partnerships around railway station redevelopment and operation of passenger trains are just about being conceptualized.
Despite these differences, there are certain cross cutting issues which need to be addressed on priority basis. First, there is an immediate need to improve the underlying financial viability of infrastructure projects across all sectors to attract institutional financing. In addition to strengthening areas like project structuring and feasibility assessment, timely land allotment and regulatory approvals etc., the other key area which needs to be addressed is having an independent regulatory mechanism for determination of tariffs and subsidies, monitoring service levels and resolving disputes. While a beginning has been made in sectors like Railways, Budget 2020 may consider making a specific provision for this purpose as more than one sector is likely to require this intervention, with some regulatory agencies (urban and housing, for example) requiring significant capacity creation at the State level.
Secondly, with State (and even local) Government likely to play a key role in financing infrastructure projects, there is a need for credit enhancement support since most of these agencies, particularly at the local Government level, are financially constrained. This can be achieved either through credit enhancement guarantees or through structured financing mechanisms like municipal bonds secured by specific cash flows accruing to the agency (for example: user charges from industrial and commercial customers) or value capture financing leveraging existing land holdings. From the viewpoint of Budget 2020 therefore, there is a need to fast track operationalization of the proposed National Credit Guarantee Enhancement Corporation which was announced last year. Measures for deepening the market for instruments like Municipal Bonds, Infrastructure Investment Trusts etc. through increased participation of pension funds, insurance companies as well as foreign portfolio investors also need to be considered.
Value capture financing is the other option which is likely to have significant potential in sectors like roads, railways, urban and housing etc. One of the options which can be explored as part of the overall value capture regulatory framework is to encourage the development of a market for alternate financing instruments like pass through certificates which are based on the incremental cash flows generated on account of property / land value appreciation consequent to infrastructure development.
Third, monetization through transfer of existing Government infrastructure projects with stable user or toll charges to asset aggregators / financing platforms are likely to emerge as the other key avenue for increasing private participation. While the trend is already visible in sectors like roads, it is expected to pick up in certain other sectors like urban infrastructure, healthcare infrastructure etc. The proceeds generated from the transfer can be used by the Government for reinvestment in early stage projects with a higher risk profile. However, many of the existing infrastructure projects may not be financially viable in their current form due to delays in land allotment, lower than envisaged user charges, higher financing costs etc. To enable a larger proportion of existing infrastructure projects avail this route, the Government may consider notifying suitable principles for renegotiation of existing concession agreements. Budget 2020 may need to set aside a corpus for meeting any additional financial support required as part of the process.
The author is Partner, Deloitte India.