The Hindu Business Line : Changes likely in depreciation norms for infrastructure projects

New Delhi, April 29 To make infrastructure projects more attractive for companies and investors, the Ministry of Corporate Affairs (MCA) is re-examining the existing depreciation policy for such entities. Though industry would prefer a higher rate of depreciation for BOOT (build, own, operate, transfer) projects, in the absence of any guidelines, the Ministry plans to ask the Institute of Chartered Accountants of India to look into the issue, official sources said.

The institute may be asked to examine whether depreciation should be allowed or, alternatively, there could be a policy for amortisation of the entire expenditure for such companies. The Government is increasingly wooing private players to invest in infrastructure projects on BOOT basis. Some investors fear the concession period is such that project owners have to transfer the asset back to the Government before they are able to reap dividends.

Meanwhile, the Ministry, on request, has allowed industry to follow an alternative method for calculating depreciation instead of a fixed rate. The Ministry has sought creation of a sinking fund by such companies for the concession period, depending on the life of the project, sources told Business Line. The concession period varies widely for such projects depending on the contractual conditions. This policy would impact all firms with stakes in BOOT infrastructure projects, including Larsen & Toubro, Gammon India, GMR, Ideal Road Builders, IL&FS, IDFC, Simplex and Soma.

Earlier, Companies Act guidelines had stipulated the same depreciation norms for a BOOT infrastructure project as that for a manufacturing factory. However, industry contends that BOOT infrastructure projects are different by nature. “The ownership of assets created on a BOOT basis is transferred back to the Government at the end of the concession period and the assets require good maintenance throughout their life. For instance, we will construct the toll road, maintain and operate it. At the end of concession period, we have to hand the asset (road) back to the Government in the same condition as it was on the date of commissioning,” says Mr Pradeep Puri, CEO, Noida Toll Bridge Company Ltd. The NTBCL, which is promoted by IL&FS, operates a toll road connecting Delhi and the satellite town of Noida.

Explaining the new concept, he said that the actual monies spent on maintaining the asset (roads for NTBCL) during the concession period are treated as ‘deemed depreciation’. Plus, the company (concessionaire) is allowed to create a sinking fund during the concession period. The value of the fund would be equal to the cost of project on the date of commissioning. At the end of the concession period, when the asset (ownership) is transferred back to the Government, the concessionaire gets to keep the sinking fund and share the benefits.

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