Budget 2018: Private sector funding for infra need of the hour

The importance of infrastructure to revive economy can't be over-emphasised.

"One thing which is most important for the whole country is infrastructure. If the government invests more and more in infrastructure, which it intends to do, it's good for the economy. The government has plans for the roads and the ports and railways. It's heartening to know that Railways would continue to invest. If India has to grow by 7-8%, infrastructure has to grow," said T V Narendran, global CEO and MD of Tata Steel.

Historically, investments in railways have come from the centre, with minuscule private participation.

The railway sector has been facing capacity constraints for the past few years and needs heavy investment for augmentation. Indian Railways plans to harness private capital for funding capex across projects, such as first- and last-mile and port-connectivity projects, logistics parks, private freight terminals, station redevelopment.

But beyond public investments, there is a need for the government to trigger private investments through adequate incentives.

A major reason behind the absence of a vibrant debt market for infrastructure has been the lack of recourse for investors, a risk, which, surprisingly could be addressed by implementation of Insolvency and Bankruptcy Code, said Sumit Binani, a resolution professional.

"The right to recourse to debt holder was limited where only banks and financial institutions could possess assets in case of default by invoking Sarfesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002). With IBC coming in, any creditor having above Rs 1 lakh of unpaid dues can approach NCLT and expect quick resolution," he said.

The government should bring back the tax incentive which was earlier being given to infrastructure bonds, said Hemant Kanoria, chairman and managing director, Srei Infrastructure Finance.

"Infrastructure financing now should progress to the next level while government should provide encouragement by guiding more investors to participate," Kanoria said.

The government in FY11 provided tax reliefs for retail investors for putting their money in infrastructure bonds under Section 80CCF.

That window for retail investors to earn tax-free returns investing in infrastructure sector was withdrawn after two years.

"To promote private sector investment in infrastructure, incentives like extension of tax holiday for infrastructure projects, relief on applicability of MAT during tax holiday, coverage of projects involving upgrading existing infrastructure under 80IA or 35-AD, and clarification on pending taxation issues with respect to InvITs (infrastructure investment trusts) can be provided. The sector is also looking at further steps to improve long-term funding availability. In this regard, higher allocation towards National Investment and Infrastructure Fund (NIIF) is expected. Also, the deduction under section 80CCF for infrastructure bonds which was discontinued can be reintroduced for select infrastructure companies/finance companies," said Shubham Jain, vice president and sector head, corporate ratings, Icra.

Kanoria wants infrastructure financing to get more sophisticated considering the nitty-gritty of cash-flow problems often faced by infrastructure project executors.

"In our country, bank guarantees are to be given but actually it is the surety that is required. We are now trying to prevail upon the government that surety bonds instead of bank guarantees and performance bonds should be accepted as banks don't really have the capabilities to access risk of specific projects," he said.

World over, there are credit surety and financial risk providers providing instruments which reduce working capital needs and facilitate project completions without delays.

"Contractors for roads, energy, defence, telecommunication and construction, among others, in most cases, face challenge of working capital issues because of the traditional models of financing that continue to dominate the sector. Bringing in credit products such as sureties and guarantees which are widely used in other developed nations can help in bringing about a change, which is the need of the hour. These products can also prove to be a solid alternative to bank guarantees," Kanoria said.

Despite a rise in working capital for project executors due to factors like increasing use of costly and technologically-superior equipment, avenues for raising funds have been limited.

"Cost of deploying new modern equipment for execution of our projects have significantly increased and in future, will increase our working capital requirements. It is customary in the industry in which we operate to provide bank guarantees or security deposits in favour of clients to secure obligations under contracts. In addition, letters of credit are often required to satisfy payment obligations to suppliers and sub-contractors. If we are unable to provide sufficient collateral to secure the letters of credit, bank guarantees or security deposits, our ability to enter into new contracts or obtain adequate supplies could be limited. Providing security to obtain letters of credit and bank guarantees increases our working capital needs. We may not be able to continue obtaining new letters of credit, bank guarantees and make payment of security deposits in sufficient quantities to match our business requirements," said an infrastructure contractor about to tap the IPO market for funds.