<b>Vinayak Chatterjee:</b> Infrastructure - Beyond the Budget

The emphasis has shifted from resource allocation to creating enabling frameworks

The infrastructure sector has clearly outgrown the Budget. Over the years, the Budget's importance has diminished in terms of its relative share of overall infra funding. Its share in the third year of the 12th Plan is expected to be only about 14 per cent, as can be seen from the last line of the table.

Simultaneously, its importance as the fountainhead of enabling frameworks for raising off-Budget resources is increasing.

Consider the following markers of this trend.

Even with an allocation of around Rs 38,000 crore for roads and highways, the roads minister talks about setting up a Rs 1 lakh-crore "off-Budget" road fund to be created by escrowing tolls from national highways and Japanese participation to meet his target of constructing 30 km of roads per day two years hence. A National Electricity Fund was announced in the Budget to help power distribution companies. And there is now a buzz about infra asset reconstruction funds in roads and power to be catalysed by the National Highways Authority of India and NTPC, respectively. An NRI fund for cleaning the Ganga has also been mentioned in the Budget speech to complement the Rs 2,037 crore earmarked for this purpose.

Public-private partnership (PPP) is clearly back with a vengeance as the only real alternative to garner off-Budget funding from cleaning the Ganga to modernising railways, gas pipelines, smart cities, airports and urban upgradation. The Budget document is peppered with references to raising funds in PPP mode and the finance minister's speech highlighted that India had the largest number of PPP projects in the world - 900 to be precise. A key step to recharge the PPP movement is the setting up of an institution called "3P India" (3P = PPP), for which the finance minister has allocated a whopping Rs 500 crore to help execute PPP projects. Clearly, the sinking enthusiasm for PPPs in the last few years of the United Progressive Alliance-II government seeks to be boldly addressed by having an intellectual anchoring for a thorough review of PPP formats, bidding mechanisms, model concession agreements, dispute resolution and renegotiation mechanisms. This is a historic opportunity to craft a world class "think tank" to rekindle the PPP fire by recycling the experience of the last 15 years. 3P India should become the referral point for PPP frameworks not just for India, but for all emergent markets.

Urban local bodies or municipalities are the lowest tier of urban governance and are more often than not, cash-strapped. The keys to urban rejuvenation lie with them. The Budget provides for the "Pooled Municipal Debt Obligation" facility, which was set up in 2006 with the participation of several banks to promote and finance infrastructure projects in urban areas on a shared-risk basis, to be enhanced from Rs 5,000 crore to Rs 50,000 crore.

Real estate investment trusts (REITs) are now close to becoming a reality. These REITs, which own and manage a portfolio of real estate properties by pooling in money from several investors, will get pass-through entity status and other incentives. The REIT structure will make available equity to developers in a situation where regular bank financing is not available for real estate.

This year's Budget also lays the road map for providing long-term funds on a sustained basis to the cash-starved core infrastructure sector. It envisages the creation of infrastructure investment trusts (InvITs). A bunch of operating assets can be pooled together in an InvIT and raise equity from capital markets. At one stroke, this provides a liquidity option for hitherto illiquid infra special purpose vehicle shareholdings.

Speaking at an event immediately after the Budget, the Governor of the Reserve Bank of India, Raghuram Rajan had this to say: "As announced in the Budget, the apex bank will work on making it easier for banks to borrow from the market through bonds and lend it to long-term infra projects. Those bonds, if used to finance infrastructure, will be exempt from SLR (statutory liquidity ratio) and CRR (cash reserve ratio)." This is likely to be followed up with the path-breaking resetting of the commercial banks' interface with infrastructure lending. With the finance minister announcing the 25/5 format, infra loans can now be readied for design for 25-year periods with five yearly resets. This makes such loans far easier to service by infra developers and clears the root cause of artificially compressed seven to 10 year loans becoming non-performing assets since they are out of sync with 20-30 year concession periods and the economic life cycle of projects. It simultaneously addresses the asset-liability mismatch concerns of the banking system.

Thus, all these measures add up to a marked shift from the Budget historically being the well-spring of state funding of infrastructure, to where the Budget now serves as an instrument for crafting frameworks that facilitate the mobilisation of external capital.

The writer is the Chairman of Feedback Infra. vinayak.chatterjee@feedbackinfra.com; Twitter: @Infra_VinayakCh