Covid-19 has had unprecedented consequences for the world as well as the Indian economy. The infrastructure sectors too have not been spared. The government has been proactive in its response to minimise the impact of the pandemic. On a positive note, the pandemic has opened up a host of opportunities across the board. In a video interaction with Indian Infrastructure, B. Purushartha, discussed the impact of the Covid-19 outbreak on infrastructure, the various relief measures and initiatives taken by the government to attract private investments, and the opportunities for private players and investors. Excerpts…
What has been the impact of Covid-19 on the infrastructure sector?
There are two broad areas of the impact of Covid-19 on the infrastructure sector. On the one hand, the liquidity in infrastructure investment has reduced. There has been a slump in demand, which has impacted the revenue streams of the infrastructure projects. On the other hand, infrastructure projects, by their very nature, require significant construction activity and labour management, and the same has been severely impacted by the crisis. A lot of labour has migrated back to their hometowns and remobilising them has been a challenge. Overall, there has been visible impact of Covid-19 on infrastructure in terms of investment availability, labour availability and revenue depletion.
What has been the government’s response to the pandemic? What initiatives are expected to have the maximum impact?
The government has taken bold initiatives to respond to the challenges thrown up by the Covid-19 pandemic. There are three broad categories of support initiatives. The first includes regulatory relaxations, such as deferring working capital instalments and interest rate on term loans, extending timelines for meeting various regulatory requirements in infrastructure projects, declaring the pandemic as a force majeure so that the concessionaires can benefit from the provisions of the clause, and providing additional time for meeting the commercial operation date and project completion requirements, etc.
The second set of support initiatives involves bringing in more investment through various reforms and removing bottlenecks. A lot of work has been done by the government towards this, giving a positive signal to both domestic as well as foreign investors. The government has waived the dividend distribution tax. Sovereign wealth funds and pension funds have been exempted from income tax. Infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) have been provided regulatory relaxations to attract investment. Capital infusion is being provided to various financing agencies to boost infrastructure projects in the country. For example, an additional equity of Rs 53 billion is infused into India Infrastructure Finance Company Limited (IIFCL). An agriculture infrastructure fund worth Rs 1 trillion has been announced to boost farm-gate infrastructure, in addition to an animal husbandry fund worth Rs 150 billion. The government is also working on enhanced viability gap funding (VGF) support to social infrastructure projects and setting up a credit enhancement company, which can help in deepening the bond market.
The third area of support involves an emphasis on public-private partnerships (PPPs). Various ministries are identifying projects that can be taken up in PPP mode. In the past six years, about Rs 56 trillion has been spent on infrastructure. The target is to spend Rs 111 trillion on infrastructure between 2020 and 2025 under the National Infrastructure Pipeline (NIP). In order to meet this target, greater support is needed from the private sector. While private sector investment in infrastructure has only been 20-28 per cent over the past six years, the aim is to increase it to at least 40 per cent in the next five years. Besides, the ministries are identifying mature and risk-free assets, which can be monetised and leveraged for the creation of new infrastructure. The NIP report has come up with a huge list of reforms to be implemented in a time-bound manner.
In a nutshell, various activities have been undertaken by the government to ensure that the effect of the pandemic on the infrastructure sector is minimised. The pandemic may be used as an opportunity to work on areas that could not get due attention in the past.
What has been the impact of Covid-19 on the government’s asset monetisation plan?
Asset monetisation is one of the areas that may see new opportunities due to the pandemic. Covid-19 has had a positive impact on the asset monetisation plan. Every ministry now understands that asset monetisation is a key reform, which needs to be undertaken in order to get more financing for infrastructure projects. In fact, assets worth more than Rs 1 trillion have already been identified in five ministries. The Ministry of Road Transport and Highways has prepared 10 bundles of national highway assets to be monetised, of which the first bundle has already been monetised, the second bundle had to be annulled, while the third bundle has been awarded. The other bundles are also expected to be bid out in the near future. Besides, the National Highways Authority of India and Power Grid Corporation of India are in the process of setting up InvITs for their respective sectors.
Given the weak financial position of the private sector amid the pandemic, what support could the government provide to ensure greater private participation?
Traditionally, infrastructure investment in India is primarily bank-led, with about 70 per cent of the funding needs being met by banks. However, banks are not an ideal source of funds for the infrastructure sector due to the asset-liability mismatch issues. Thus, there is a need to look at new and innovative funding sources for this space. One of the ways is to deepen the bond markets for fund-raising. Further, some sort of credit enhancement is needed to ensure that the bonds issued have a high credit rating to attract good response and patient capital from sovereign wealth funds, pension funds, insurance funds, etc. Currently, credit enhancement is being done by the IIFCL. In addition, setting up another credit enhancement company to support the infrastructure sector is under consideration.
Innovative PPP models like the hybrid annuity model (HAM) have received more attention than traditional BOT, under which 40 per cent of the upfront payment is made by the government itself and the balance 60 per cent is provided by private players, which is eventually returned to them in six-month annuity payments. Under the VGF scheme, VGF support is provided to those projects that are economically important but commercially unviable. Enhancing VGF for the social infrastructure sector is also under consideration. Further, tax exemptions have been given to sovereign wealth funds and pension funds, which are a source of patient capital for long term investment in infrastructure. Reforms are also under way for modifying the build-operate-transfer (BOT) and HAM concession agreements so that the private sector can participate as partners and not merely as vendors/contractors. Overall, the government is creating an enabling environment, where the private sector can secure funds at lower interest rates.
What are the key priority areas in the Covid-19 times?
Currently, the government is working on different areas simultaneously. New projects are being launched and stalled projects are being revived. The station modernisation plan in railways is moving forward with about 50 railway stations under different stages of development in PPP mode. Request for quotation (RFQ) has been issued to invite private participation in train operations. In the airports sector, six airports have been awarded in PPP mode, while an additional six are in the pipeline. In every sector, projects that were either stalled or moving at a slow pace have been identified and are now being pushed forward. Focus is also being laid on finding new projects that can be taken up in PPP mode.
What would be your message to developers and investors?
I believe that tough times generally bring out the best in us and opportunities are always hidden in the apparently distressed times. Even in the field of infrastructure, Covid-19 has presented various opportunities across sectors, including railways, airports, shipping, petroleum and telecom. The developers may identify the opportunities and make informed decisions. The pipeline is huge and brimming with opportunities. There could not possibly have been another time when a single portal offered a list of 6,800 projects, with 40 per cent of those already under implementation.