Budget 2020 | Govt may increase capital outlay in infra, give roadmap for NIP: ICRA

Shubham Jain

The Finance Minister had last month unveiled broad contours of the National Infrastructure Pipeline (NIP) with the projected investment of Rs 102 lakh crore over a six-year period between FY20 and FY25.

Given this backdrop, it is expected that the Union Budget will plan for increased capital outlay towards infrastructure and provide the roadmap for achieving the NIP target.

As per the NIP, infrastructure investment in FY21 is projected at Rs. 19.5 lakh crore – a massive increase of 43 percent over FY2020 estimates of Rs 13.6 lakh crore. The Centre’s share is estimated at ~39 percent, which would mean a capital outlay of Rs. 7.6 lakh crore.

A major part of this capital outlay is expected to be budgeted towards transportation infrastructure i.e. roads, railways, etc. Dedicated allocations for specified large infrastructure projects announced such as Bharatmala, Sagarmala, Smart Cities, Inland Waterways Development, etc is also likely to be made to expedite these projects.

While an increase in the infrastructure capital outlay, commensurate with the NIP is almost certain, the funding of the same would be a key point to watch.

Given the limited fiscal headroom, the fiscal deficit targets are expected to be relaxed to meet the huge funding requirements for productive asset creation.

Nevertheless, the increased infrastructure capex cannot be entirely met through increased budgetary support and the government will likely have to depend on higher internal and extra-budgetary resources (IEBR) of the Central Public Sector Enterprises (CPSE), including borrowings, equity dilution, and asset monetisation.

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, given the scale of investment required, this alone may not be sufficient and an increasing burden on the CPSEs may risk them being pushed to the level at which they can become unsustainable and eventually have to rely on the Government for support.

Hence, some long-term sustainable source of financing needs to be explored which can bridge the infrastructure funding gap.

Nevertheless, given the critical role played by key implementing agencies like the NHAI, it is expected that the budgetary allocation towards such entities will be increased to ensure that the pace of execution doesn’t suffer.

Over the last few years, as the NHAI has significantly scaled up the pace of highway infrastructure development, it has been increasingly dependent on borrowings as the budgetary allocations in the last two years were lower than anticipated.

With FY21 being the mid-point of the initially envisaged timelines for the Bharatmala and allied programmes, it remains a crucial year and allocations are expected to catch up.

Therefore, ICRA expects the allocation to increase by at least 40 percent to Rs. 1.01 lakh crore. To bridge the shortfall, the NHAI has also initiated asset monetisation through the toll-operate-transfer (TOT) and is planning to divest stake in mature road assets through the Infrastructure Investment Trust (InvIT) route.

Further clarity on the NHAI’s planned InvIT is expected in the upcoming Budget. Similar to the NHAI’s plan, other CPSEs are also likely to use the InvIT route to raise funds.

Further, besides the Centre, there is a high dependence on the state governments and the private sector to achieve the NIP target. Hence, measures towards the revival of private sector interest is expected.

Roads is 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 the low levels in the last five years (compared to the past where most of the awards were through the BOT (Toll) route) is a reflection of the reduced risk appetite for the private sector.

The road network itself is undergoing significant changes with some of the economic corridors under Bharatmala competing with a few existing stretches. Overall, these factors would make traffic forecasting extremely challenging.

Therefore, the BOT (Toll) model in its current form may not have many takers till the developers are adequately compensated for such losses on account of the new competing programmes - which remained unaddressed in the recently published modified model concession agreement.

Achieving financial closure also would be a challenge given these uncertainties. Therefore, a complete overhaul of the existing BOT (Toll) concession framework with balanced risk sharing is the need of the hour for the revival of private sector interest.

The provision to re-negotiate the contracts is an important suggestion made by the Kelkar Committee to balance the risk-sharing among the stakeholders in the PPP model.

Therefore, setting up of the PPP Project Review Committee and the Infrastructure PPP Adjudication Tribunal for re-negotiating concessions in case 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.

Infrastructure project financing in India is predominantly from the banking sector. With banks facing huge stressed asset problems, their ability to extend credit to the already stressed sectors like infrastructure remains constrained.

Hence, it is crucial to take measures towards easing a project financing environment like lowering project implementation risks (similar to Hybrid Annuity Model in the Highway sector) and providing partial credit enhancement can help enhance debt availability and improve the private player’s appetite to take up projects.

In addition, the National Investment and Infrastructure Fund (NIIF) can play a big role in channelising long-term funds to the infrastructure sector. These steps are likely to help improve long-term fund availability.

(The author is Senior Vice President & Group Head, Corporate Ratings, ICRA)

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