Budget 2015: Think Out Of Box To Fund 'Infra Building'

Ever thought of putting your money in building the half-finished flyover you wish should have come up by now, making your travel to office a bit more pleasant? 

It may sound crazy, but many infrastructure finance experts seriously think that is prudent. They believe it could be the most important source of funds for that flyover and also a host of similar infrastructure projects in the country. Why? 

Most infra projects need funding support for long term, and they start generating returns only after a while. And that sounds similar to what you expect from your retirement money.
The Union Budget 2015 may well make that possible to a large extent.

"Capital markets' access to retirement funds is good for investors as well as the country. If we need to move at a pace of 9% GDP growth, we need $5 trillion worth of investments in infrastructure. The banking sector can't provide that as we need funds for 20-30 years for infra projects. The retirement money could be a potential source of such long-term money," Sundeep Sikka, president & chief executive officer, Reliance Capital Asset Management, said.

Forget about retirement money, even flow of mutual fund money into infrastructure sector has been restricted till now.

The Association of Mutual Funds in India, or Amfi, has sought a separate tax concession over and above the Rs 1.5-lakh deduction ceiling under Section 80C for unit-linked pension plans under the National Pension Scheme, which, if allowed, would bring in long-term inflows into the capital market.

"It is imperative to design long tenure financial instruments with attractive returns so that domestic savings can be channelled into infrastructure creation instead of being invested in unproductive assets like gold. Inflation-linked bonds need to be tried out as well. Ideally, any financial institution which has been accorded Public Financial Institution (PFI) status should be allowed to mobilise resource by using these instruments," said Hemant Kanoria, chairman and managing director Srei Infrastructure Finance Ltd.

In the last budget, Infrastructure Investment Trusts were announced on the lines of Real Estate Investment Trusts. However, the tax incidence needs to be fine-tuned in order to make these InvITs more effective, feel industry experts.

"Besides higher allocation towards the sector, to encourage higher investor participation, the budget could announce tax breaks for Infra Investment Trusts. Further, some tax breaks and incentives could be announced for the construction companies as well," Kanoria, who's firm has been actively lending to the infrastructure sector, said.

In the 2014-15 budget, identifying the needs and requirement of infrastructure sector, the finance minister said that as an innovation, a modified Real Estate Investment Trust (REIT) type structure for infrastructure projects was being worked upon as Infrastructure Investment Trusts, which would have a similar tax efficient pass through status, for public-private partnership (PPP) and other infrastructure projects. This would have helped reduce the pressure on the banking system while also making available fresh equity.

Following this, the market regulator Securities and Exchange Board of India (Sebi) in September notified norms for listing of such InvITs along with business trust structures and REITs paving the way for flow of funds to the infrastructure sectors.

But till now, InvITs have found few takers among sponsors who want these instruments exempt from minimum alternate tax.

"Many of government's earnest efforts to help raise funds for the infrastructure sector have suffered because of absence of supplementary announcement on such instruments with clarity," said Arun Singh, chief economist of Dun & Bradstreet Info Services India.

But why would retail investors be ready to jump into riskier investment in infrastructure projects when even large corporate sectors have shied away?

Post a prolonged slowdown in economic activities involving asset creations, even top corporate bodies are starved of liquidity, which is stuck in stalled projects.

"Till the private investment sentiment revives, I think it would be good if the government can set the ball rolling by raising public investments, especially in infrastructure projects. I stress on infrastructure projects because of the multiplier impact they have on the economy in terms of creating jobs, generating domestic demand and enhancing the competitiveness of the economy," Kanoria said.

Recent crash in oil prices, upcoming spectrum auction, and ongoing PSU divestment, pave the way for the government to initiate higher infra spending. Hence, the government would focus on higher allocation towards flagship programmes of Bharat Nirman, APDRP, or Accelerated Power Development and Reforms Programme, AIBP, or Accelerated Irrigation Benefit Programme, and NHDP, said Angel Broking in its budget preview report.

Smart City project is a recent innovation of the central government that can be used as a trigger to revive investment in infrastructure building from the private sector by devising attractive incentive structure, feels Singh of Dun & Bradstreet.

Essel group is an early mover in the Smart City initiative, a concept which its chairman Dr Subhash Chandra hit upon even before Narendra Modi's government unveiled it in this year's budget. Till now the group has inked memoranda of understanding with state governments of Madhya Pradesh and proposed similar projects in West Bengal and Uttar Pradesh.

Beyond attracting household money and stimulating government investment in the infrastructure sector, bringing in foreign money into the sector tapping into the global pension fund is another area industry experts want the government to focus in the coming budget.

"Recently, the RBI permitted companies in India to issue tax-free, secured, redeemable, non-convertible bonds in rupees to persons resident outside India to use such borrowed funds for on lending to the infrastructure sector. But this implies that eligible entities will be only companies controlled and owned by government. It should expand the list of such eligible entities and include Public Financial Institutions also for issuing overseas bonds," Kanoria said.

"It's high time the government takes serious steps towards formation of a Sovereign Wealth Fund and announce an enabling policy in the budget," Singh said.