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The infrastructure story is waiting to unfold

The infrastructure story is waiting to unfold

With the new government firmly in the saddle, there are visible ægreen shoots´ of reforms on the infrastructure landscape. However, much remains to be done on the infrastructure front.
Infrastructure is the backbone on which the economic and social wellbeing of any country hinges. Though India has emerged as the third largest economy, its GDP growth rate slowed down to less than 5 per cent in FY 13-14, as against a CAGR of 8.4 per cent during 2003 – 2010. This was primarily due to the stagnation in the infrastructure creation in the country in the last few years, which in turn, was partially due to external factors such as the global financial crisis and partially due to internal issues including lack of decision making, regulatory bottlenecks, etc. The country therefore requires large scale growth in the infrastructure sector to achieve the GDP growth rate of 7-8 per cent.

Energy
The power sector has suffered primarily on account of cancellation of allocation of captive mines by the Supreme Court, increase in the cost of imported coal (especially from Indonesia and Australia) and non-availability of sufficient quantities of domestic coal to projects having fuel linkages. To address these issues, the cost of imported coal is being allowed to be made ´pass through´ on a case-to-case basis by respective regulatory bodies. Further, new projects under ´Case-I´ bidding norms will be allowed to pass through the increase in fuel price, thereby protecting them from price variation. To fast-track re-allocation of coal mines, the government has announced the ´auction´ process. The blending of imported coal with domestic coal has also been allowed to ensure adequate coal availability to projects. The government is also examining pooling of domestic gas with imported LNG to make affordable gas available to gas-based power plants. This coupled with other incentives would help operationalise around 16,000 MW of gas-based power plants, currently lying idle. This will also bring renewed focus and investment in power transmission networks. In the field of renewable energy, the government has formulated a draft scheme for development of ultra-mega solar parks to set up 25 solar parks (cumulative capacity of 20,000 MW) over the next five years. The above measures are expected to give a major boost to the power sector in the near future.

Roads and Urban Infra
Continuing from the previous NDA regime, the present government is also highly focussed on development of road infrastructure. Some of the key initiatives include reducing the approval requirement for land acquisition from 80 per cent to 70 per cent of land owners, de-linking forest and environmental clearances for linear projects and exempting road upgradation projects from forest clearances. The aggressive premiums offered by bidders to NHAI and lower than projected traffic had caused huge cash flows stress to developers and also impacted the banking system. Accordingly, NHAI is considering rescheduling of premium, whereby the developer will pay lower premium in the initial years enabling developers to meet the opex and financial commitments.

Transportation
Recent policy guidelines by MoS on providing land, deregulation of tariff setting for major ports and establishing a mechanism for PPP projects are expected to provide major impetus to the ports sector, both on new capacity additions as well as acquisition of existing capacities.

To summarise
With a burgeoning aspirational middle class and a favourable demography, India is well positioned to script the growth story in the 21st century. Robust infrastructure development is the key to turn potential into reality.

The government is taking various policy initiatives to revitalise the infrastructure sector, which together with the steps taken by the RBI to boost financing, present an enormous opportunity for the infrastructure sector.

To improve regional connectivity, the government proposes to develop 50 low-cost airports under the PPP route; besides it has already approved five budget airports. The government is also giving a lot of thrust on urban transportation with special focus on developing Metro projects in urban centres.

Railway infrastructure is expected to get a major thrust with the approval of 100 per cent FDI in high-speed train systems, suburban corridors and dedicated freight line projects. Dedicated Freight Corridors on two routes – Eastern (Ludhiana, Punjab to Dankuni, West Bengal) and Western (Mumbai to Delhi) have been sanctioned and the process of selection of bidders is in progress. These freight corridors will bring seamless connectivity between the port and the hinterland. Logistics terminals and economic zones proposed along these corridors will enhance the economic activities.

Infra Financing
To supplement the policy initiatives by the government in infrastructure, the RBI has announced key policy measures on the infra financing front. The RBI has recently allowed flexible structuring of loan for projects in infrastructure and core industries, whereby banks can structure loans as per economic life of the project with an´in-built´ provision of periodic refinancing. This would ensure long-term viability of infrastructure projects by smoothening the cash-flow stress in initial years. Longer repayment tenor allows additional capital in the hands of promoters to take up new projects, besides reducing the usage tariffs for facilities, which in turn, will benefit the economy.

Similarly, the RBI has also permitted refinance of existing project loans of more than Rs 1000 crore by fixing a longer repayment tenor, as long as 25 per cent of the outstanding loan is taken over from the existing lenders. This will reduce the stress in the system while maintaining the asset quality of the banks. The RBI has also come out with draft guidelines for partial credit enhancement for funding infrastructure projects. Infrastructure Debt Funds and Tax Free Bonds have also been encouraged to facilitate tapping into low-cost and long-tenor finance for infrastructure projects.

This article has been authored by Rajesh Agarwal, Sr Vice President, Infrastructure Group, SBI Capital Markets Limited.

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