The Hindu Business Line : Infrastructure financing: Issues and expectations

How can the Union Budget 2008-09 have a positive impact on infrastructure financing in the country? The Budget can enhance infrastructure financing in a number of ways. It could increase allocations to different infrastructure sectors, provide fiscal incentives, facilitate the development of the domestic debt market and induce foreign investments into infrastructure.

Last year’s Budget initiated the process for utilising foreign exchange reserves for infrastructure financing and permitting domestic mutual funds to launch and operate dedicated infrastructure funds. The Committee on Infrastructure Financing, headed by Mr Deepak Parekh, made several recommendations for meeting the country’s infrastructure financing requirements and I expect forthcoming Budget to address them.

Key issues

Removal of TDS on corporate bonds: The removal of TDS (tax deduction at source), which is not uniform across all investors, can have a positive impact on secondary trading.

Reduction and uniformity in stamp duty for financing documents and securitisation transactions: The high stamp duty makes debt instruments less attractive than loans and also inhibits the development of a broad-based market.

Similar tax treatment for listed and unlisted equity: It is understood that unlisted equity would be the dominant source of equity capital in infrastructure and similar tax treatment on capital gains on unlisted equity sales as that to listed equity transactions will make providers of risk capital indifferent between the two.

Rationalisation of dividend distribution tax (DDT): The infrastructure sector often has a multi-tier corporate structure consisting of holding company and SPVs (special-purpose vehicles). This is required due to various reasons including provisions in the ‘concession documents’. At present this will attract DDT at two levels making it less attractive to the Investors. The industry has high hopes that this year’s Budget will address this issue.

Infrastructure holding companies: Most developers house their infrastructure investments in a holding company as a separate business from that of the parent company and these holding companies get classified as NBFCs under RBI guidelines. This puts several restrictions such as limits on bank borrowing, ECBs and FDI. Treating these companies as a separate class of NBFCs will help getting exemptions from such restrictions. In addition to these, there are other issues linked to the Budget like whether Section 80IA companies will be exempted from minimum alternative tax (MAT) and whether Section 10 (23G) will be re-introduced (it was omitted in 2006-07). The re-introduction of Section 10 (23G) benefits could result in lower cost of funds to infrastructure projects, as banks may be willing to pass on some of the tax benefit to the borrower.

Envisaged investment requirement and challenges: Significant growth in investment in infrastructure is planned during the Eleventh and Twelfth Plan Periods. Based on various Working Group and Consultation Papers prepared by the Planning Commission the investment requirement in the Eleventh Plan is likely to climb up to $492 billion and further increase up to $989 billion in the Twelfth Plan.

There are several challenges in achieving these targeted investments. The Fiscal Responsibility and Budget Management laws constrain government spending in the future and hence, the private sector would have to increase its share in infrastructure investment so is user charges as a means of financing. The levy and collection of these has proved to be difficult in the past.

Issues in infrastructure financing: The private sector needs to bring in significant investments, as the Central and State governments’ support to infrastructure will be constrained in the future with only limited budgetary resources available due to the FRBM laws. Sector exposure norms and asset-liability mismatches may also put constraints on debt financing from banks. At present, bonds are more expensive than loan financing in India and issues relating to hedging currency risk make external commercial borrowings (ECBs) a less attractive.

Then there is the issue of availability of equity. Concession agreements have restrictive exit clauses. The holding company structure in PPPs also impedes the availability of equity and private equity funds face restrictions in bidding for projects and entering at a later stage with a majority stake. Insurance companies are still not playing a significant role in infrastructure financing due to various reasons.

(The author is Executive Director, PricewaterhouseCoopers)

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