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DDT Exemption For INVITs Lead Infra Push

Increase in Clean Energy Cess from 200 per MT to 400 per MT; will have a big positive impact on the clean-tech and renewable sector

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The focus of this Union Budget 2016-17 clearly has been on growth through infrastructure development. Government has realized and acknowledged the fact that it will have to contribute more towards infrastructure capex than anticipated, mainly on back of historical baggage of stuck projects, aggressive project bidding and slowdown in availability of infrastructure financing for the private sector. In continuation to the previous budget, the government has therefore announced an aggressive increase in capital outlay towards Roads (Rs 97,000 Cr) and Railways sectors (Rs 120,000 Cr), aggregating to Rs 218,000 Cr, an increase of 20 per cent over the previous years' outlay in these sectors. One should remember that the Modi government had doubled this allocation during the previous year itself as compared to the last year of the previous government. Therefore this increase of 20 per cent is commendable given that they were already working on a higher base.

The overall (public + private) expenditure towards roads and railways is expected to be Rs 300,000 Cr in FY17 (discounting the 12th five year plan by 20 per cent, given overall reduction in capex across all sectors), implies that the government will contribute 72 per cent, which is much higher than the earlier expected contribution of 45 per cent, further accentuating the argument given above. The key beneficiaries of this outlay will be the listed and unlisted construction companies like Sadbhav Engineering, KNR Constructions, PNC Infra, GR Infra, GVR Infra, J Kumar, etc; which have leaner balance sheets and are exceptionally poised to cater to this public expenditure. Larger players like L&T, Simplex and NCC would also benefit from this increased allocation.

SPVs distributing income to INVITs exempt from Dividend Distribution Tax
This is one of the key reforms announced in this budget, hugely positive for the infrastructure sector. It implies that cash flows from infrastructure SPVs can now be distributed without any leakages to proposed investment trusts. It is expected to be a massive boost for attracting foreign investments through the InvIT structure for several Road, Renewables and Power platforms which had historically tried this route in the past and failed due to low Cash yields to InVIT investors; main reason being the tax leakages. This is also expected to improve the valuations in the secondary market of infrastructure assets. We have already seen multiple M&A transactions in the last 12 months, especially in the Roads sector, which will be further encouraged.

Focus on Rural Infrastructure
While this budget focused more on rural development, the Finance Minister has pledged focus on improvement in rural connectivity w.r.t. Roads as well as Electricity. Government has planned to spend Rs 27,000 crore towards rural roads under Pradhan Mantri Gram Sadak Yojana (PMGSY) in FY17. Incidentally, this rural programme was initiated in 2000 by NDA itself under Shree Atal Bihari Vajpayee. Investments towards rural roads under this scheme has increased under the new government from Rs 8,386 crore in FY13 to Rs 19,200 crore (expected for FY16)

Electrification of villages has been the prime focus of the Power Minister, Mr. Piyush Goyal, who has been successful in electrifying 5,542 villages over the last 12 months which, is higher than the combined achievement of previous 3 years, was pointed by FM during his budget speech. FM has now allocated Rs 8,500 crore towards Deendayal Upadhayaya Gram Jyoti Yojna and Integrated Power Development Schemes with a target to achieve 100 per cent village electrification by May, 2018.

Other Key areas worth highlighting:
" Out of 8,300 kms of stuck road projects, amounting to investments upwards of Rs 100,000 crore, Mr. Gadkari has been able to revive 85 per cent of the projects.
" FM has announced 3 key initiatives/reforms which can be construed as preventive and curative steps towards reviving PPP in the Infra sector :
o Public Utility (Resolution of Disputes) Bill to be introduced during 2016-17 to streamline institutional arrangements for resolution of disputes in infrastructure related construction contracts, PPP and public utility contracts.
o Guidelines for renegotiation of PPP Concession Agreements to be issued. Given that a typical infrastructure project has a life between 15 to 40 years; there are multiple instances where certain clauses of the Concession agreement become redundant or impractical and needs to be reviewed in a dynamic environment. One example could be the clauses restricting transfer of shareholding. Hence, such guidelines allowing renegotiation of concession agreements will be welcome, keeping in view the long term nature of such contracts and potential uncertainties of the real economy, without compromising transparency.
o A new credit rating system for infrastructure projects which gives emphasis to various in-built credit enhancement structures will be developed. This will ensure standardisation of asset risk evaluation and support financial institutions and banks in appropriate pricing of infrastructure loans

" Increase in Clean Energy Cess from 200 per MT to 400 per MT; will have a big positive impact on the cleantech and renewable sector. Hopefully, the increased collections will be used by the government to increase purchases of Renewable Energy Certificates (RECs), further strengthening of balance sheets of Discoms and investment towards clean energy technologies. However, this will be a negative move for the coal based thermal power plants. Overall cost of production from coal/gas is expected to increase by 10 - 12 paise per unit of power.

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.

Ashish Agarwal

The author is Director – Infrastructure, Equirus Capital has over 9 years of experience in investment banking with coverage of Infrastructure, Power, Transportation, and allied sectors.

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