The Hindu Business Line : A Budget boost for infrastructure financial products

Innovative products, such as takeout financing, structured financial loans and securitisation, have not been extensively used in infrastructure financing. MR MANAV BANSAL, ASSOCIATE DIRECTOR, PRICEWATERHOUSECOOPERS PRIVATE LTD, CHENNAI.

Most tax professionals doze off during Part A of the Budget Speech. Are they missing out something? Quite possibly, because this portion of the Finance Minister's annual presentation speaks of many initiatives on the infrastructure front. And the much-used word `infrastructure' encompasses whole industry verticals such as transportation and energy, water supply and waste management, education and health. To know about how this year's Budget has impacted infrastructure, Business Line interacted with Mr Manav Bansal, Associate Director at PricewaterhouseCoopers Private Ltd, Chennai. A chartered accountant by qualification, he advises on corporate tax, expatriate tax, withholding tax and regulatory matters on inbound and outbound investments. Mr Bansal's experience spans well over a decade and covers a wide spectrum of industries and services.

Excerpts from the interview:

What sectors are covered under infrastructure? And which are the big companies in the play?

In the Economic Survey, the following sectors fall under infrastructure:

Transportation: Roads, highways and bridges; railways; airports; and ports;

Energy: Power (generation, transmission and distribution); and oil and gas (exploration and production, transmission and distribution (piped and retail));

Urban infrastructure;

Water supply and sewerage;

Solid waste management;

Communication (telecommunication, etc); and

Social infrastructure: Education and health.

The sectors covered under Section 80 IA of the Income-Tax Act are:

Road, including toll road, a bridge or a rail system;

Highway project, including housing or other activities, being an integral part of the highway project;

Water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system;

Port, airport, inland waterway, inland port or navigation channel in the sea;

Cross country natural gas distribution network, including gas pipeline and storage facilities;

Telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and Internet services; and

Industrial park or Special Economic Zone (SEZ).

Some big infrastructure players in India are: Adani Group; AES Corporation; Alstom Project; Bechtel Corporation; CONNEX; DP World (Dubai Port World); DS Constructions; Gammon India Pvt Ltd;

Gamuda Berhad; GMR Infrastructure Ltd; GVK Infrastructure; Hindustan Construction Company; IJM Corporation Berhad; Intertoll; IVR Corporation Ltd; Jaiprakash Industries Ltd; Lanco Power; Larsen and Toubro (ECC division); Mahindra and Mahindra; Nagarjuna Construction Company; P&O Ports; Punj Lloyd — Infrastructure Services; Ramky Infrastructure; Reliance Energy; Reliance Infrastructure; Simplex Infrastructure Ltd; Tata Power; Unitech; and Veolia Water, the Water Division of Veolia Environment.

Do you see any clear trend in the attention that infrastructure has been receiving over the years in the Budgets?

Government outlay for infrastructure has increased significantly over the years. Clearly, infrastructure has been the focus of Budgets. Not only have the outlays been increasing, but private investment is also being encouraged. Earlier, the emphasis was on bringing in more and more projects, now the emphasis also includes encouraging financial products suited for infrastructure. Some of the steps in this year's Budget include:

Continued support for the Government's flagship urban development mission, Jawaharlal Nehru National Urban Renewal Mission, with increased allocation of Rs 4,987 crore.

Provision for NHDP has been increased from Rs 9,945 crore to Rs 10,667 crore, and this will further encourage one of most successful PPP programmes in this country to date.

The import duty on dredgers has been withdrawn to strengthen port infrastructure.

What were the expectations on the infrastructure front in the run-up to the Budget? How far did the FM meet the expectations?

The Finance Minister has clearly demonstrated the Government's commitment to infrastructure. On the content side, the developers, financiers and other stakeholders were perhaps looking for more in terms of tax relief and restructuring, regulatory changes, capacity building and facilitating investments. But, perhaps, these changes are an ongoing process, which goes on irrespective of the Budget.

Most infrastructure development companies (especially PPP initiatives) adopt the SPV (special purpose vehicle) structure for ease of administration. This can have a cascading effect of dividend distribution tax, which has not been addressed in this year's Budget.

On the unattended issues.

Though the allocation for the Rajiv Gandhi Drinking Water Mission has been enhanced to Rs 5,850 crore and for the Total Sanitation Campaign to Rs 954 crore, we would like these resources to be used not only to increase the target coverage (and making up the slippages) but also clear targets for improved service delivery. In rural water and sanitation spheres, big problems are often about the proper use of assets to deliver service rather than creation of assets. Some of the steps taken to conserve water resources are welcome, and we hope that the new initiatives will see greater focus on tackling water scarcity.

Your views on the soundness of the funding mechanisms that the Budget proposes for promoting infrastructure.

The Budget has taken many steps to improve infrastructure financing, and these include:

Setting up a Rs-100 crore revolving fund to quicken project preparation, with the fund contributing up to 75 per cent of preparatory expenditure in the form of interest-free loan to be recovered from the successful bidder, is an excellent step. We do hope that the authorities concerned, especially at the State and city levels, will make full use of this opportunity. This provides an excellent leverage and (if one were to take the example of the road sector) this fund can help develop projects worth around Rs 40,000 crore.

Allowing mutual funds to operate dedicated infrastructure funds is welcome.

The Deepak Parikh Committee report is referred to, but we will need to look at its recommendations and how they are implemented, including the use of forex reserves and the National Small Savings Funds.

To facilitate the creation of urban infrastructure, the Budget allows issue of tax-free bonds through State Pooled Finance Entities formed for raising funds for a group of urban local bodies. This may promote funding of smaller infrastructure projects developed by local bodies.

Extension of concessions under Section 80IA to natural gas distribution networks across the country, including gas pipeline and storage facilities integrated to the network, may give the required boost, especially if combined with regulatory reforms.

Extending the limit of Rs 50 lakh per investor per year with respect to capital gains bonds issued by the NHAI under Section 54EC is welcome.

Are there innovations in infrastructure financing that we may usefully adopt? Best practices?

Innovative financial products, such as takeout financing, structured financial loans and securitisation, have not been extensively used in infrastructure. These products backed by monoline guarantors are being extensively used in developed economies.

What factors should an individual investor consider before putting his money in an infrastructure company?

Sectors that the company is working in and the concessions it has taken.

Past and present order book.

Past track record of servicing equity of debt instruments.

Projects the company is investing in, especially the counter-party with which it is signing the concession agreements.

Commitment of its CEOs/managers and its mid-term business plan.

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