The Hindu Business Line : Build on core for growth

Against the backdrop of the global economic slowdown and absence of private sector spending, construction companies are increasingly looking to the Government to increase infrastructure spending for their sustenance . Construction component in infrastructure accounts for more than half the project cost, and measures to support this sector will benefit the economy, say industry representatives.

With the Budget round the corner, construction companies are hoping for measures to encourage public-private partnerships (PPPs), simplification of procedures to speed up project implementation and a range of tax sops.

Mr J. P. Nayak, Chairman, Sub-Committee on Infrastructure, Confederation of Indian Industry (Southern Region), says involvement of the private sector in infrastructure building is inevitable in the context of the investment that is needed and the fiscal constraints faced by the cash-strapped Central and State Governments. This calls for measures to enhance the quality of PPPs by fast tracking such projects and investments through measures to encourage private sector.

Globally, the stimulus programmes involve investment in infrastructure — generating work for the core sector , which in turn generates employment and jobs in the construction sector, he says.

The Government has identified infrastructure spending as a priority in the Eleventh Plan, but half way through this period, it is yet to reach the targeted levels. Ideally, infrastructure spending has to be around 12 per cent of GDP — about $500 million a year — but it is now closer to 4 per cent and the Government expects it to be around 8 per cent in the next two years.

Mr Nayak, who is the Member of the Board & President (Machinery and Industrial Products), Larsen & Toubro Ltd, said what is needed is a concerted effort to bring in PPP across the entire gamut of infrastructure, including roads, ports, energy, airports, urban infrastructure and irrigation.

The previous Government has concentrated on road projects through the development of the Golden Quadrilateral and the North-South and East-West corridors. But in the last two year the focus had been lost due to issues in model concession agreements.

Risk Sharing

The concept of private involvement in road projects will only be sustainable with fair risk sharing between the owner (government) and the contractor.

The model concession agreement imposes too much risk on the private sector which the introduction of annuity concept can help to alleviate. It is government agencies that study traffic density and the annual increases, but in the toll road concept the contractor takes the gamble on the traffic volume increasing. Annuities help remove this uncertainty, he said.

Private sector involvement is slow in other areas of infrastructure development, including ports, and is yet to catch on in rail infrastructure. The delay in project clearances is also a major handicap. Even in power projects where the involvement of private sector is high, clearances are an issue with more than 50 government agencies needing to give their nod before work can be taken up, he says.

Apart from speeding up PPP procedures, the government departments also need to develop the capability to prioritise and identify projects for implementation. They should have a ‘shelf of projects’ that needs to be pushed through, Mr Nayak said.

Domestic manufacturing is also at a handicap compared to imports of finished products. Labour laws need to be more flexible and the manufacturing sector has to be brought to the fore, he said.

In a recent representation to the Central Government, an association of some of the largest engineering construction firms pointed out that the biggest component of infrastructure cost is construction and it is critical that the Government address the issues relating to the construction sector.

Budget hopes

The sector is demanding a range of measures to enhance flow of funds into infrastructure development.

The investment targets for infrastructure have to be stepped up to accelerate economic revival. The Interim Budget had postponed the infrastructure investment target of 9 per cent of GDP to 2014 instead of 2012 set earlier. But with the signs of revival, the target may be advanced to 2011.

The Government should also expedite disinvestment in PSUs to augment funds for infrastructure.

A secondary market for debt trading should be in place to enable private sector raise funds in infrastructure space through long term corporate bonds.

Pension funds could also be allowed to invest 10-15 per cent of their corpus in infrastructure bonds along the lines of permission granted to LIC to invest in equity.

Introduction of the common goods and service tax will help the construction industry rationalise its tax structure and simplify compliance.

The Government should permit domestic companies to refinance rupee loans through external commercial borrowings; capital gains tax treatment for special purpose vehicles (SPVs) have to be rationalised, say industry representatives.

The law should be amended to reduce capital gains tax rates for SPVs on a par with listed companies. It is mandatory that infrastructure projects are handled through SPVs, which are generally unlisted and cannot get capital gains exemption granted to the listed/parent companies.

Similarly, dividend distribution tax should also be rationalised. Infrastructure development business calls for a multi-tier corporate structure with a holding company at the top which is a listed entity.

This leads to a cascading effect on dividend distribution tax which, should be payable at one level only.

The companies are demanding that each member’s share of profit or loss may be taxed along with his total business income instead of the current practice of taxing the share of profit in a joint venture even when there is an overall loss in the company.

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