Budget 2018: Time Arun Jaitley gave a leg-up to private investment in railways, airports

Globally, infrastructure has been one of the most attractive asset classes, with infrastructure funds sitting on over $140 billion of dry powder in 2016. India has had limited success in attracting a large share of this, largely due to the risk–return mismatch. Any steps in the Budget that improve the fiscal situation further, and hence improve the country’s credit rating, will reduce the mismatch by reducing risk perception at the country level. This will be further reduced by addressing risk perception at the infrastructure sector level.

The finance minister had spelt out several such steps in his budget speech in 2015. These included Public Private Partnership (PPP) model to be revised with balanced risk-sharing, plug–and–play readiness of projects, improvement in dispute resolution processes, regulatory reform and private sector investments in sectors like Railways and Airports. To provide a context to the current Budget, I will summarize the progress against four tracks that include these measures.

First, the government has successfully kick-started the construction cycle, through increased public spend on infrastructure. This will likely also be the theme of the current Budget, though there are trade-offs with social sector spends and containing the fiscal deficit. In the medium-term, the impact of fiscal discipline on credit rating, and hence cost of foreign investments, can be significant.

Second, the process of addressing financial stress of infrastructure sector projects has now made some progress, through the the Bankruptcy Code. The Budget could perhaps provide a specialized approach to fast-tracking infrastructure projects. As under-construction projects get completed (with the government’s efforts in addressing land and clearances), some of them will find revenues insufficient to service debt in the operating period. Anticipating a process-solution to these would help in banks returning to future PPP projects.

Third, on re-balancing risks for future PPP projects, good progress has been made in the roads sector with the Hybrid Annuity Model. With a part of the Central Road Fund being earmarked for inland waterways, this sector is also ripe for attracting private developers through Hybrid Annuity Model.

There has been little opportunity for private investment in Railways and Airports, though long-term investors are very keen on both these sectors. Existing cash flows in both these sectors could be leveraged in both these sectors to attract investors (similar to Toll Operate Transfer in Roads), and channel them to areas that require efficiency improvements. Innovative approaches are also needed to attract infrastructure developers to Smart City programs and Affordable Housing projects.

Finally, there is need for a big push for use of digital technology in infrastructure. User convenience, like e-tolling and integrated-ticketing-system for public transport, are seeing some progress. Significant potential in project construction remains untapped. Besides improving construction cost, time and quality, digital technology can significantly reduce disputes, and enable faster resolution, thus reducing construction period risk premium.

While this (and others) are not strictly Budget issues, the Budget has often been used to for larger policy announcements, and hence any initiatives that impact the issues outlined here, would have a positive impact on the sector.

(The writer is Partner & Leader, Infrastructure, PwC)