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'Need A New Model Of Financing Infrastructure'

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What in your view is the way forward on financing of infrastructure?
Infrastructure business is fundamentally predictable and solvent. However, since the investment is lumpy and front ended, it has long-gestation for positive cash-cycle. Therefore, the main point is how to make infrastructure financing match the project cash flow. Today, it is the short-term funds which lead to a mismatch in cash-flow and creating stress in the assets.

So,  it requires some innovative financing, matching the project cash flow and the preferred cost of financing -- thus requiring longer tenor financing (with long drawn out repayments) to enhance financial viability of the project and cheaper cost of finance to improve affordability of mass users. Our suggestions are:
  • Long-term funds
  • Lower interest rates so that there are lower user charges to make infrastructure affordable to ‘Mass Users’
  • Alternative to banks (e.g. Bond/Insurance/Pension Funds etc) for project financing

In short, we need a new model for financing infrastructure.

Will different approaches work better for different sectors - roads, airports, power and so on?
Infra assets are solvent. The current issues arise due to global downturn and some sector specific challenges. However, the situation can easily be improved and positive investment sentiment can be created through some policy interventions. First of all, The government needs to take positive steps to release stress in the infra assets.  One way to do that is by offering a consolidated infrastructure package that addresses all issues and concerns for the sector as a blanket. These would be in terms of financing, taxation and policy reforms. There is an urgent need to look at a sustainable (long-term and low interest rate) financing model for infra development.

However, some sector specific initiatives would help reviving the sectors individually. 

  • Provide a special package for gas assets facing fuel shortage that includes - allowing additional restructuring for 2- 3 years without categorising that asset as NPA, making applicable interest rate to be base rate, allowing capitalisation of interest till normal operations resume, extending the moratorium for principal repayment and giving declared goods status to Natural Gas / RLNG to remove locational dis-advantage of Power plants.
  • Provide a  package to Power projects  similar to that offered to Discoms - Moratorium of 2-3 years on repayment
  • Grant a special dispensation to reduce the interest rate
  • Transparent and faster mechanism for addressing claims
  • Initiate awarding of new projects and infusing funds into the system through EPC / Annuity contracts
  • Exit policy to be made more effective by expanding its applicability not only to stressed projects but also to non-stressed projects as well.
  • Easing of regulations for developers to exit (100 per cent) from the project immediately after COD will help  in releasing equity that can be reinvested in other projects

  • Allow private Airport Operators to issue long term non-taxable infrastructure bonds to raise the required funding from the market.
  • Easing of cash flows issues arising from delayed Receivables from related government entities, such as Air India / Indian Airlines
What is a possible solution to the roads and highways problem - where many developers have gone wrong on traffic estimates, over-aggressive bidding and have promised high premiums ? Do you think PPP is of limited use in this sector?
The first part of the solution would be to immediately take a clear decision on all the projects lined up for rescheduling/renegotiation. This should be followed by awarding of new projects and infusing funds into the system through EPC/ Annuity contracts. PPP is an essential part of sector growth. We have seen aggressive bidding but it has also been affected by uncontrollable factors like downturn in the macro economy, clearance related delays etc. Taking learning from the past and proactively addressing bottlenecks can make PPP more matured and effective.
What would you like to see the FM do on direct and indirect taxes?
  • Expediting unified taxation (GST) reforms
  • Boost sentiment in Infrastructure investment through Tax incentive
  • Provide MAT relief
  • Develop a mechanism to avoid multiple levies of taxes on infrastructure goods/services.
  • Extend the fiscal benefits u/s 80-IA up to the end of 12th Plan.
  • Provide an exemption similar to 10 (23) G to encourage long term investments

What in your mind needs to be done to revive power generation in India?
To protect the investments already made in the sector, there is a need for policy measures to help improve the balance sheets of the generating assets and provide support to achieve positive cash flows. Provide a consolidated restructuring package to Power projects similar to that offered to Discoms. Key features already highlighted in Answer no. 2. Moreover, transmission capacity and coal supply must be augmented quickly to remove operations bottlenecks.

What, if anything, can be done to curb inflation in your view?
Removal of ‘Supply side’ constraints is the effective way to tackle inflation. Some initiatives that can immediately address inflation, especially food inflation are:
  • Release ‘excess’ stocks of food grains (and other produce) in the open market for distribution. This would immediately correct the hoarding prevalent in parts of the country
  • Improve mechanism of wholesale markets and cold storage and distribution chains so as to minimise waste
  • Regulate futures markets in agricultural commodities to reduce speculative trading
  • Gradual abolishing of artificial controlled prices

How can the FM adhere to fiscal discipline and lower the deficit ?Is cutting subsidies a desirable solution?
Cutting subsidies to the extent possible especially to the ‘creamy layer’ is a long-term solution. Subsidies by themselves are not bad if they are effective.

Hence, they may be diverted away from areas like fuel to core government areas like healthcare and education.