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Big Push To Infrastructure

Money begets money. Will the Rs 4 trillion budgetary push to infrastructure attract global investors?

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On 1 February, Finance Minister Arun Jaitley announced government’s outlay of Rs 396,135 crore in ‘creating and upgrading’ new integrated infrastructure paradigm in 2017-18. Of this amount, Rs 241,387 crore is allocated for roads, railways and ports. For the aviation sector, the FM proposed amendment in the Airports Authority of India Act that will help monetise surplus land for the development of airports and related infrastructure. This means, more work and orders to companies operating in sectors such as steel, cement, construction, real estate, roads, railways and aviation. “An effective multi-modal transportation system is important for a competitive economy,” said Jaitley.

However, for a speedier development of highways, ports, airports and railways, the public-private-partnership (PPP) route needs to be strengthened. In 2015, the Kelkar Committee suggested overhauling of the PPP framework in India through measures such as funding from hybrid models, adoption of international best practices, allowing for the renegotiation of contracts, and discouraging Swiss challenge method in the procurement process. The Budget has remained silent on these crucial aspects, leaving it to the respective ministries and their ministers to take up the issues during the course of the next financial year.

The status of infrastructure to affordable housing in this Budget, however, has made it easier for the developers to raise funding. This will lead to rise in demand for affordable housing which in turn will boost demand for cement as the housing sector alone consumes over one-third of the cement supply. Push to Pradhan Mantri Awas Yojana and Pradhan Mantri Gram Sadak Yojana (PMGSY), both getting higher allocation, will help India Inc. in a big way.

Push to Connectivity
According to Jaijit Bhattacharya, in 2016, out of a total of 1,702 transport infrastructure projects under implementation stage, 832 were reported to be grappling with either time or cost overruns with time delay of as high as 100 months for some of them. “Therefore, regulatory measures are essential to avoid delays at each stage — from project approval to awarding of the contract, to its implementation such as online and single-window clearances for starting an infrastructure project, improving the procedures required for obtaining work permits and the process of land acquisition,” says Bhattacharya, Partner (Infrastructure & Government Services), KPMG India. But were there any signs of such announcements? “Not really. I think Budget has restricted itself to fiscal announcements. Clarity on dispute resolution mechanisms will be announced at some point of time in the year. Without that, PPP and raising funds will be a challenge for the private sector,” says Bhattacharya.

For development of national highways, the FM has allocated Rs 67,000 crore, including the development of 2,000 km of coastal roads while Rs 19,000 crore has been allocated to PMGSY to connect far-flung habitats. State governments too are expected to put in around Rs 8,000 crore in PMGSY. The goal: better connectivity and more jobs.

Infra Status to Affordable Housing
Simply put, with infrastructure status granted to affordable housing, developers can access even external commercial borrowing. “EPFO funds can come into this segment and insurance companies can invest in these projects since they are classified as infrastructure,” explains HDFC Chairman Deepak Parekh. According to Anshul Jain, Managing Director, Cushman & Wakefield, apart from easier access to institutional credit, the infra status will help developers reduce cost of borrowing for affordable projects. “The approval process for affordable projects will be simplified; clear guidelines will increase transparency in the segment,” he says. The changes under Section 80 IB with respect to size of units (built-up area to carpet area), timeframe for project completion (three to five years) and geography (upto 60 sq.m. beyond the four metros) will encourage greater participation by organised developers in the affordable housing segment, says Anita Arjundas, CEO and Managing Director, Mahindra Lifespace Developers. These measures will lead to job creation too, say experts.

Challenges: In recent months, new product launches have virtually gone down to a minimal. The Budget is silent on helping consumers buy a big pile of unsold flats (over 6 lakh unsold units according to industry reports). “What the Budget does is, help developers create new housing at lower costs, going forward. Which means, the future stock of houses will be cheaper than the current stock of unsold housing. To add to the existing woes, several states have earmarked funds to push low-cost housing that will now get distributed efficiently,” says Bhattacharya of KPMG.

Railways: Hits & Misses
For Indian Railways, the allocation of Rs 1.31 lakh crore, the highest-ever capital outlay, with a gross budgetary support (GBS) of Rs 55,000 crore, has been provided for 2017-18. A proposal for railway safety fund worth Rs 1 lakh crore has been made where the seed capital will be provided by the finance ministry, with the balance to be raised by the railways from other sources. Indian Railways will also list its subsidiaries — Indian Railway Catering and Tourism Corporation, Indian Railway Finance Corporation and Ircon International. Jaitley said the railways will increase its throughput by 10 per cent by upgrading dedicated corridors which have high-traffic volumes. The national carrier will lay down 3,500 km of tracks in 2017-18 as compared with 2,800 km in 2016-17. To stay competitive and arrest the falling freight revenues, Indian Railways will need to offer end-to-end transportation solutions for commodities.

Challenges: On allocations made to railways, Abhaya K. Agarwal, Partner, Infrastructure and PPP at EY says: “Funds have never been the concern, it’s about debt servicing. While the overall GBS has gone up, railways has been losing traffic — both passenger and freight. There is no detailing on how railways will increase its throughput by 10 per cent. How will railways increase its speed? Which lines will get promoted? Where will the upgradation happen? Budget has no detailing on these important issues.” There are some key issues that do not find any mention in the Budget, concurs Bhattacharya of KPMG. “We need to know the cost of laying new lines or the risks that will be involved in PPP. Additionally, railways have large land banks. They need to monetise them in a manner that they generate a long-term annuity income. We hope these key issues will be addressed during the course of time.”