Higher budgetary allocation to railways, roads, ports can kickstart the ailing investment cycle

As the Union Budget nears, infrastructure sector looks forward to a push from the government towards reviving the ailing investment cycle – both through continued enhancement in public sector capex and incentivising and supporting private sector to revive struggling projects and take up new projects.

The infrastructure sector expects further increase in budgetary allocations towards various sectors with focus on railways, roads, and ports. Further, there could be dedicated capital allocation for some large infrastructure projects announced such as bullet trains, Bharat Mala, Sagar Mala, Smart Cities, inland waterways development, etc. However, any major increase in budgetary allocations will be contingent on the flexibility allowed by the government’s fiscal deficit targets, along with higher expenses towards revision of allowances as per the Seventh Central Pay Commission report and risk of crude oil price increase (which could lead to lowering of fuel cess). On the other hand, integration of the Railway Budget with the Union Budget, will provide more leeway for railways capex.

To revive private sector sentiments towards taking up new projects, the sector expects initiatives like creation of an independent regulator for specific infrastructure sub-sectors (like roads), easing of regulatory environment, and incentives in the form of extension of tax holiday, relief on applicability of MAT during tax holiday, and coverage of projects involving upgrading existing infrastructure under 80IA or 35-AD. Similarly, follow-up on the Public Utility (Resolution of Disputes) Bill which was introduced in Budget 2016-17 for faster resolution of disputes in Public Private Partnership (PPP) projects will be on the wishlist. In addition, the sector expects some more innovative project models like the Hybrid Annuity Model (HAM) which was taken up in roads sector which can result in better risk sharing and attract participation.

The sector is also looking at further steps to improve long-term funding availability for the infrastructure sector. As the scale of funding requirement for infrastructure sector is huge, and cannot be met from banking sector alone, more funding avenues needs to be strengthened. In this regard, measures towards strengthening of corporate debt market, and traction on Infrastructure Investment Trusts (InvIT) and National Investment and Infrastructure Fund (NIIF) are expected. Allocation towards NIIF is expected to be increased in the budget. The sector also expects creation of a dedicated sub-fund under NIIF which can invest in stalled projects and revive them.

To reduce the burden of infrastructure debt funding from banks, and increase the share of Infrastructure Finance Companies (IFC), the deduction under section 80CCF for infrastructure bonds which was discontinued post FY2013 can be considered for select infrastructure companies/finance companies to provide them access to low-cost long term funds.

The government is also expected to support the use of the newly announced credit rating system for infrastructure sector. The new rating scale is based on the expected loss (EL) approach and better captures the inherent strengths in infrastructure projects which by the nature of being long-gestation projects tend to get lower credit rating on the conventional credit rating scale.

(The writer is Sector head- corporate sector ratings, ICRA Ltd)

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