 "Taking steps to boost infrastructure growth")
The election of the government in 2014 ignited many hopes with respect to fundamental changes in the infrastructure sector, which is apparently a catalyst for economic growth. While the previous budget allowed the government limited flexibility to make many changes, the expectations from the current budget to kick start the infrastructure investment cycle were high. The government, in its budget for 2015, has taken many steps in the right direction in this respect and some of the key areas that merit attention are set out below.
PPP arrangements and disputes
One of the key budget announcements was that the government would look at the existing PPP frameworks and ensure that future PPP contracts were not tilted heavily in favour of the government by transferring all risks to private participants and that there was an equitable balance of risk. This is fundamentally a step in the right direction to encourage additional investment in the sector.
Further, the budget also provided recommendations on a new disputes bill and a regulatory reform bill which should make dispute resolution an easier process and make regulation more streamlined.
Power and renewable power
Currently, the coal auction process is underway and is expected to provide fuel security to existing power and non-power assets. The government announced that it would like to set up 5 new UMPPs and these would be set up on a bidding basis once all regulatory clearances are in place, land is acquired and the fuel source is also identified and available. The budget also mentioned that they would like to extend this ‘plug and play’ model to other sectors like roads to enhance investment.
Renewable energy
The government has ambitious targets to increase the installed renewable generation capacity from the existing 32 GW to approximately 175 GW by 2022, including about 100 GW of solar capacity. These targets are ambitious, even by global standards. While one of the steps taken was to raise the green energy cess on coal from Rs 50 to Rs 200 per ton, to help fund some of this expansion many open points remain, especially with respect to financing this capacity expansion, tariff models, etc. It would be imperative to have more granular steps in this respect to boost investment in this sector.
Roads and transport
The high speed rail corridors and dedicated freight corridor related announcements should also generate interest from international players to participate in this sector.
Infrastructure financing
The Finance Minister spoke about a new Bankruptcy Code which should help lenders have a tangible resolution on stressed assets and also may result in some assets and deals being brought to the market. The government has also spoken about an infrastructure fund with an initial investment of Rs 20,000 crore which can then be leveraged to fund infrastructure finance companies which can access domestic and international capital markets and multiply this investment.
The government has also proposed tax free bonds for projects in the rail, road and irrigation sectors, and this should help in lower cost financing for some projects.
Further, the government has recognised the absence of a deep corporate bond market and has proposed enhancing the debt market. They have also proposed some changes to the REIT and INvit regulations, but these structures would still need regulatory intervention in reference to multiple taxes and levels of taxes along with other considerations like the residual holding of the sponsor to make these vehicles effective.
In summary, the government has proposed many different initiatives which, if implemented over a period of time should provide impetus to infrastructure development. However, the translation of these proposed policy/reform ideas into regulations and how these are cascaded down to individual ministries and states remain to be seen.
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Bhavik Damodar, Partner, KPMG in India
PPP arrangements and disputes
One of the key budget announcements was that the government would look at the existing PPP frameworks and ensure that future PPP contracts were not tilted heavily in favour of the government by transferring all risks to private participants and that there was an equitable balance of risk. This is fundamentally a step in the right direction to encourage additional investment in the sector.
Further, the budget also provided recommendations on a new disputes bill and a regulatory reform bill which should make dispute resolution an easier process and make regulation more streamlined.
Power and renewable power
Currently, the coal auction process is underway and is expected to provide fuel security to existing power and non-power assets. The government announced that it would like to set up 5 new UMPPs and these would be set up on a bidding basis once all regulatory clearances are in place, land is acquired and the fuel source is also identified and available. The budget also mentioned that they would like to extend this ‘plug and play’ model to other sectors like roads to enhance investment.
Renewable energy
The government has ambitious targets to increase the installed renewable generation capacity from the existing 32 GW to approximately 175 GW by 2022, including about 100 GW of solar capacity. These targets are ambitious, even by global standards. While one of the steps taken was to raise the green energy cess on coal from Rs 50 to Rs 200 per ton, to help fund some of this expansion many open points remain, especially with respect to financing this capacity expansion, tariff models, etc. It would be imperative to have more granular steps in this respect to boost investment in this sector.
Roads and transport
Bhavik Damodar, Partner, KPMG in India
The high speed rail corridors and dedicated freight corridor related announcements should also generate interest from international players to participate in this sector.
Infrastructure financing
The Finance Minister spoke about a new Bankruptcy Code which should help lenders have a tangible resolution on stressed assets and also may result in some assets and deals being brought to the market. The government has also spoken about an infrastructure fund with an initial investment of Rs 20,000 crore which can then be leveraged to fund infrastructure finance companies which can access domestic and international capital markets and multiply this investment.
The government has also proposed tax free bonds for projects in the rail, road and irrigation sectors, and this should help in lower cost financing for some projects.
Further, the government has recognised the absence of a deep corporate bond market and has proposed enhancing the debt market. They have also proposed some changes to the REIT and INvit regulations, but these structures would still need regulatory intervention in reference to multiple taxes and levels of taxes along with other considerations like the residual holding of the sponsor to make these vehicles effective.
In summary, the government has proposed many different initiatives which, if implemented over a period of time should provide impetus to infrastructure development. However, the translation of these proposed policy/reform ideas into regulations and how these are cascaded down to individual ministries and states remain to be seen.
__________________________________________________________________________________________________________
Bhavik Damodar, Partner, KPMG in India