Building Infra in an Investment Boom

How the Centre will bridge the fiscal gap, and citizen’s aspirations, with on-ground availability of financing is the question that needs to be addressed

A AS THE DECKS ARE CLEARED for Budget 2022-23 in the long shadow of the pandemic, budgetary allocations on infrastructure will impact the pace of economic activity and renewed growth. It goes beyond academic interest, therefore, to understand how the government will stimulate longterm sustainable finance for the sector and boldly put together a viable business case for large-scale private investment that shares in the socio-economic benefits. The latter, through regulatory reforms that allow for alternative avenues of finance, such as pension funds.

Infrastructure Development and Financing Today

Much has been done. For a start, about `111 lakh crore is to be invested in the National Infrastructure Pipeline (NIP), an amalgam of roads, highways, bridges, railways and urban infrastructure expected to decimate bottlenecks to movement of people, materials and services. Close to 50 per cent of the NIP is financed by the government. This investment is indisputably a GDP multiplier with tangible public benefit. Hence the need to incentivise the private sector to share in the economic returns from taxation, tolls and real estate appreciation.

The multiplier effect is from the scale of the projects that are envisaged. Investments such as the Delhi-Mumbai Industrial Corridor, Chennai-Bengaluru Industrial Corridor, East-Coast Economic Corridor— each comprises myriad projects. Economic value, and gain, will arise from new road development, railway linkages, ports, airports, industrial and logistics parks, residential and commercial property; the list goes on and on. One can well imagine the positive impact on our Tier II and Tier III cities, and the work opportunities this creates. Activities on this scale attract involvement of central government departments, state and local government bodies, and then require multi-level coordination on a gargantuan scale. To illustrate, the NHAI currently oversees national highway construction, while the State Public Works or roads department maintains state highways, with the local municipality providing last-mile connectivity to the industrial park.

To speed up implementation, there is great expectation that the Gati Shakti technology-enabled platform will coordinate 16 government ministries as they work on financing the NIP projects. For efficient use of scarce resources, the initial entrants to the Gati Shakti platform could be from priority sectors that enjoy production linked incentives.

As part of innovative financing for the `111 lakh crore NIP, the National Monetisation Pipeline envisages recycling or monetisation of approximately `6 lakh crore from operating/completed infrastructure projects in roads, railways, aviation, urban development and telecom in the period to fiscal year 2025. And the recently established National Bank for Financing Infrastructure and Development envisages an infrastructure financing portfolio of `5 lakh crore within four to five years. State governments are being incentivised to undertake capital expenditure and participate in asset monetisation by low-interest, long-term loans.

The overall government share of capital spending is 48 per cent of which the Centre’s share is estimated at 25 per cent, with the balance provided by the states. The remaining 52 per cent would need to come from pension funds, insurance companies, private equity and private investment, banks and financial institutions (see The Pension Gap).

Incentivising Infra Financing

Sustainable financing as described above should continue to be supported and encouraged through fiscal measures. This is important to pull away from financing large infra projects by banks and NBFCs. These financiers typically have short-term liability profiles, leading to mismatch between the long-term invest

ment and the shorter loan tenures.

Overseas long-term infrastructure investors such as sovereign wealth funds, pension funds, and private equity funds have been incentivised to remain interested in the India infrastructure story. However, interest of domestic pension funds and insurance company investment in infrastructure projects is less noticeable, and much below the permissible 5 per cent of total corpus.

Benefits such as exemption on dividends, interest income and long-term capital gains for sovereign wealth funds and foreign pension funds can be extended to subsidiaries or SPVs promoted by them. This could include ‘interest’ in noncorporate entities as an eligible mode for investment for sovereign wealth funds, long-term capital gains from indirect transfers of assets located in India, and sovereign wealth pension fund exemptions extended to other categories of investors such as real estate investment trusts that invest in affordable housing projects and smart city initiatives as well as infrastructure-focussed private equity funds.

The government can perhaps consider an upward revision to the existing investment cap in certain alternative assets. This would require strengthening of governance, disclosure, and risk-based supervision mechanisms for select funds under the National Pension System, which are targeted at the section of the populace with high disposable incomes and financial literacy. A higher weighted-tax deduction of 150 per cent of personal contribution and enhanced exemption on final withdrawal/maturity would make pension funds more attractive as savings. Over the medium to long term, the national pension corpus will grow as coverage increases to support an ageing population and our aspiration should be similar to countries such as the US and other developed countries where the ratio is almost equal to or even exceeding that of their GDP. This will provide more funds for infrastructure financing, and steady cash flows to the investors.

With regard to relieving the tax burden arising from separate SPVs being formed for project financing purposes, cash flow support can be given to project-specific SPVs through consolidated group-tax filing, allowing the offset of losses incurred by an SPV against the profits of other entities in the same group.

While there were dedicated funds created for infrastructure from cess, most were done away with after GST was introduced. One option could be to augment revenues by addressing tax-related anomalies in certain sectors. For example, property tax collection has been estimated at around 0.2 per cent of GDP in India vis-à-vis around 3 per cent in the US, UK etc.

Diversifying the Sector Mix for Infrastructure Investments

While there has been increased FDI in infrastructure over the past three to four years, this has veered towards roads, power transmission, telecom towers and renewables. Increased traction is required in other sectors such as railways and urban infrastructure, in which substantial investments are envisaged in the NIP.

The Centre can proactively identify the pipeline of bankable projects, standardise likely PPP structures, concession terms and associated documentation, based on its key learnings from successful projects. In some sectors, it would be vital to strengthen the regulatory framework to provide a “level playing field” to potential private investors/operators. A typical case in point is in attracting private investment in passenger train operations where potential private operators saw adverse risk-return trade-off due to track infrastructure being shared with the Indian Railways, which also doubles as regulator and operator.

There is no doubt that India needs the infrastructure so ably articulated in the NIP. Nor is there disagreement that we need new ways and means to finance these long-term projects. How the government will bridge the fiscal gap, and citizen’s aspirations, with on-ground reality on availability of financing is the question that needs to be addressed. Building infrastructure is currently an ambitious task, given the precarious funding, but this ambition is not a bridge too far for potentially the world’s third-largest economy. We need to take advantage of the investment boom.