ICRA expects the government to make an announcement on equity raising plans/or launch of the NHAI InvIT to fund the ambitious Bharatmala programme
The new government in its first Budget is likely to maintain the continuity on the major programmes launched during its last tenure viz. Bharatmala Pariyojana (Highways), Sagarmala (Ports), railway station re-development programme, inland waterways development, the Namami Gange project, the Swachh Bharat Mission, UDAN (Airports), metro rail and Smart Cities (Urban Infra).
The last five-year period (FY14-19) witnessed huge government spending on infrastructure segments like roads (increased by ~353 percent between FY15-19) and railways (increased by ~146 percent times between FY1-19), which is likely to further increase over the next five years.
Given the limited fiscal headroom, investors expect the Budget to provide a roadmap on infrastructure project funds; capital outlay for transportation infrastructure is likely to increase by 8-10 percent.
With a sizeable increase in planned capital outlay towards the infrastructure sector, the budgetary allocation has to be increased commensurately. However, given the limited fiscal headroom, to support such huge investments, the government has to invariably depend on internal and extra-budgetary resources (debt/ equity) of the Central Public Sector Enterprises (CPSE) along with private sector participation.
To facilitate fundraising, reputed infra-based CPSEs can be allowed to raise long-term funds in the form of infrastructure bonds/tax-free bonds. However, this alone may not suffice.
For instance, while the NHAI borrowing programme increased as per the plan, the allocation in the last Budget was lower than required thereby necessitating dependence on other funding avenues.
Therefore, to bridge the shortfall in budgetary allocations, the NHAI is expected to raise equity by monetising more assets through the toll-operate-transfer and Infrastructure Investment Trust (InvIT) routes by transferring mature assets to special purpose vehicles.
Therefore, ICRA expects the government to make an announcement on equity raising plans/or launch of the NHAI InvIT to fund the ambitious Bharatmala programme.
Further, the revival of private sector interest is the need of the hour to reduce the financial burden on the government. Roads are one sector where private participation is relatively easy to attract and will remain crucial to support huge investments required towards the Bharatmala programme.
The fact that the BOT (Toll) awards have been at low levels in last four years (when compared to the past where a majority of the awards were through BOT (Toll) route) is a reflection of the reduced risk appetite for the private sector.
The provision to re-negotiate the contracts is an important suggestion made by the Kelkar Committee to balance risk share among stakeholders in the public-private-partnership (PPP) model.
Therefore, setting up of PPP Project Review Committee and the Infrastructure PPP Adjudication Tribunal for re-negotiating concessions in cases of distress in projects (not because of aggressive assumptions/irrational bids) resulting in a default (if the direct cost implications on account of re-negotiation are less than the financial outcome of doing nothing) - would be a step in the right direction.
With banks facing problems of stressed assets and following the current NBFC crisis, their ability to extend credit to already stressed sectors such as infrastructure would remain constrained.
The last Budget made a proposal to promote investments in the A category rated bonds (current threshold being AA category rating). However, there has been no progress on this.
Much infrastructure financing is currently supported by the banking sector. The corporate and infrastructure sectors together account for less than 30 percent of the bond issuances.
Appetite for long-term bonds rated below AA category is low. The relaxation of the rating threshold (lower investment grade) could encourage domestic insurance companies and pension funds to invest in bond issuances from the infrastructure sector.
Deepening of bond markets is required to support long-term infrastructure financing, especially given the twin challenges faced by commercial banks - asset-liability management and increasing share of stressed assets.
In addition, the National Investment and Infrastructure Fund (NIIF) can play an active role in channelising long-term funds to the sector. These steps are likely to help improve the long-term fund availability to the sector.
The author is Senior Vice President & Group Head - Corporate Ratings, ICRA Ltd.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.