Sanjeev Kaushik, Deputy Managing Director, India Infrastructure Finance Company Ltd, speaks on the challenges facing infra financing and the likely contours of the post-GST regime.
Infrastructure projects in India face multiple financing challenges. How can they be surmounted? What steps need to be taken to make infrastructure projects a more bankable proposition for the private sector?
Infrastructure projects are capital intensive and require long-term funding of around 20-30 years. While banks have so far been a dominant source of funding for the sector, they may not be able to provide the same level of support going forward, owing to exposure and capital constraints. Given the huge funding requirements of the infrastructure sector in India and limited budgetary resources, it is no doubt that private sector investments need to scale up significantly.
The Government of India has taken several reformist measures lately to make infrastructure investment a more bankable proposition for the private sector. In the roads sector, the government has introduced Hybrid Annuity and Toll-Operate-Transfer (TOT) models to better realign risk. Measures such as compensation to developers in case the delay is not attributable to them, and relaxation in exit norms, are expected to address the liquidity issues faced by developers. The government has also allowed a one-time financial assistance for languishing National Highway (NH) projects to speed up construction in the sector. Further, awarding of projects only after acquisition of 80 per cent land has been made available is also expected to reduce delays and lead to faster completion of projects.
In the power sector, re-bidding for coal mines was done in a fair and transparent manner and a scheme to revive troubled power discoms, the Ujjwal Discom Assurance Yojana, or UDAY, has been announced.
Indian companies have also been allowed to issue rupee-denominated bonds in the offshore market, known as Masala Bonds. Innovative financing solutions such as credit enhancement have also been introduced to enable wide investor participation in the corporate bond market. This is expected to ease the stressed balance sheets of prominent developers in the country. IIFCL pioneered this product with the first-ever bond issuance in the infrastructure sector in 2015.
Specialised mechanisms such as Infrastructure Debt Funds, Infrastructure Investment Trusts, and National Infrastructure Investment Fund (NIIF) have been introduced to augment private investment into the sector.
While the above measures are steps in the right direction, implementation will remain a key factor to determine the success of these measures.
What are the GST implications for infrastructure developers and EPC contractors, with first indicators suggesting a higher than expected effective GST tax rate?
GST is a significant milestone in the history of the country and is expected to impact all taxable sectors of the economy, including infrastructure.
The Model GST law treats a ´works contract´ as a ´service´. This provision is expected to remove uncertainties over the treatment of EPC contracts as provision of service, supply of goods, or a composite contract involving both. This move is also expected to reduce contracting prices by ensuring provision of incremental GST credits in the procurement chain. Also, presently, both VAT and service tax is applicable on works contract. With GST, one can expect EPC prices to come down under the new tax-efficient structure. This in turn is likely to benefit EPC contractors and developers. However, the true impact of GST can only be better estimated once there is clarity on sector-wise GST rates.
Could you identify the pain areas that still need resolution before the new GST regime comes into force?
Under the current policy, infrastructure projects enjoy various indirect tax concessions/exemptions, which help in lowering the cost these projects. Given the government´s thrust on boosting the infrastructure sector, it may be prudent to allow similar exemptions under the GST regime as well to avoid increase in project costs and tariffs.
How would the GST differ for infrastructure developers vis-a-vis infra contractors?
The Model GST provides clarity and certainty to EPC contractors by clearly specifying ´works contract´ as ´service´, while reducing the contracting prices as mentioned already. This in turn is likely to result in gains for developers as well.
However, it remains to be seen if concessional duty benefits under various indirect tax laws for infrastructure projects would continue.
What is further needed to be done to make infra projects a bankable proposition for the private sector? By when will the infra market space in India become mature enough for private sector players to participate and bid for projects on a PPP model? Are hybrid annuity models here to stay?
Over the years, the government has increased its focus on attracting private sector participation in the infrastructure sector via PPP mode. India today has a well-developed PPP ecosystem and more than 1,000 infrastructure projects have been undertaken under the PPP mode. However, as the PPP infrastructure sector is maturing, new challenges and opportunities have come up with respect to several aspects including financing, contractual frameworks, and structural aspects.
The Kelkar Committee for revisiting and revitalising the PPP model of infrastructure development has made several recommendations, including capacity enhancement of the public sector, setting up an institution to invite private investment in infrastructure, independent regulators for certain infrastructure sub-sectors, changes in MCA, etc. Key recommendations of the Committee which have already been announced in Budget 2016-17 include a Public Utility (Resolution of Disputes) Bill for infrastructure and a policy for renegotiation. The government is also innovating with the bidding methodologies and has introduced better risk sharing models such as the Hybrid Annuity Model and Toll-Operate-Transfer method. The Hybrid Annuity Model certainly is a positive move and is expected to reduce burden on developers and ensure proper risk allocation. Measures such as these are expected to create a more enabling environment over the next few years for the private sector to participate in.
How has the issue of dedicated infrastructure project specific funds being siphoned off towards other infra interests of the concessionaire by private players worked against the infrastructure business? How can more professionalism and fiscal discipline be instilled into the private sector infrastructure domain in India, especially in the wake of current interest and buyouts by foreign investors of stressed infrastructure assets in India?
Lenders may undertake close monitoring and hand-holding to prevent developers from undertaking activities such as inflating costs of one project and diverting the debt taken as equity into some other project. Lenders may be trained to enhance appraisal capabilities to better ascertain project costs in such cases.
Are there any implications for the infrastructure sector that need to be provided for by infra developers and contractors in the wake of a higher than expected GST tax rates for EPC (contractors) and developers of infra in India? Is viability gap funding (VGF) going be indispensable for infrastructure development in India, post GST?
The impact of GST can be better assessed once GST rates are announced by the government. The VGF facility may continue to be required in a developing country like India with huge infrastructure investment requirements, to enable private sector participation in the sector.