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Budget 2017: Will PPP Get A Boost?
Financial stress in the banking sector remains one of the key hurdles to financing of new PPP projects
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Last few years have seen public spending on infrastructure increase, to help kick start the construction cycle. Both Roads and Railway sectors have increased public spending in line with this strategy. While the Budget Speech in 2015 laid out this strategy, it also emphasized the need for several steps to bring commercial financing back into infrastructure over time. The progress on those, over the next two years, has been mixed.
- While the Budget 2015 proposed to encourage corporatization of Ports, the amendments cleared by the Cabinet this year delegate powers, but fall short of enabling commercial financing at Port level.
- Enabling commercial financing through the Bond market, through tax free bonds and easing RBI norms, has seen limited success.
- Revising PPP model, with improved risk sharing, has been implemented in the Road sector. Several projects have been awarded on the Hybrid Annuity Model (HAM), which has been designed to attract long-term-steady-return investors.
- Plug-and-play readiness of PPP projects has improved, with the better prepared HAM projects achieving financial closure.
- PPPs in other sectors have remained slow. Though several Rail PPP projects, including 4 on Annuity model, were proposed, these did not come into the market. Nor did the 4 airport projects, except last month when the RFQ has been issued for Jaipur and Ahmedabad. The process for two Railway Station modernization projects has made some progress this year.
- The National Investment and Infrastructure Fund has been created, and is preparing to start making investments next year.
- Dispute resolution process has been strengthened, though the proposed Regulatory Reform, particularly in Railways, remains work in progress.
While Budget 2017 is likely to continue the emphasis on public spending on infrastructure, it would also be a good time for the Finance Minister to take stock of progress on the above, and proposed corrective measures to bring back commercial financing into the sector. Financial stress in the Banking sector remains one of the key hurdles to financing of new PPP projects. Implementation of several measures proposed by the Kelkar Committee (e.g. framework for renegotiation of contracts) to revive PPPs also remain uncertain.
The impact of the Finance Ministry on the Rail budget would be a first, this year. While the financials of the Railways have deteriorated (with significant drop in coal movement), the need for investments remains high. At about 1.2 lakh crores, the annual investments in Railways has nearly doubled over the last few years, but remains short of the annual spend required to achieve the target of 8.5L crore during 2015-19.
Progress on the Dedicated Freight Corridors (DFC) and the High Speed Rail project will push up the investment for 2017-18. Institutional measures needed for rapid improvement in the financial strength, which is critical to attract commercial funding, remain work - in - progress. Also, there has been little news about the next two DFCs that were announced. The Delhi-Chennai DFC, along with proposed spur to Vizag, would give a significant boost to the east coast economic corridor.
The Road sector, at over 50 lakh crore, is the other large draw on the Budget from the Transport sector. However, improving logistics cost and quality, as well as the carbon footprint of logistics, would require increased allocation to Inland Waterways and to the Sagarmala program. On the passenger side, though significant reform in public bus - operations was announced in the last Budget, there has not been any significant news on its implementation. For Airport sector, the Budget would be a good opportunity to provide clarity on how the Regional Connectivity Scheme, intended to give a boost to smaller airports, would be funded.
The Budget speech is likely to place heavy emphasis on the aam - aadmi, a preview of which was seen in the New Year's eve speech of the PM. Over the years, several concessions have been announced to give a boost to Affordable Housing. These will need to be supplemented with ground level reforms on land and legal issues to attract large developers to the really low cost end of the spectrum. Strong legal framework for better balanced tenancy laws could give a significant fillip to the rental housing model of development. Also, any changes in taxation system that enable revival of manufacturing, if complemented with harmonization of rules for various types of Industrial Parks, could help revive the industrial infrastructure space.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.