My expectations from Budget 2010-11(Infrastructure)

Infrastructure - Expectations from Budget 2011-12(this was the first article in the pre Budget series of Beta(IIM-A)

 By Anandh Sundar

Infrastructure sector (real estate, power and construction) heavily depends on governments for both supply and demand stimulus. While State Governments control the supply side factors ( Stamp duty, provision for infrastructure, registration, regulation of land, approvals), the Centre controls supply side (tax breaks for infra-bonds, refinancing, environmental clearances etc) as well as demand side factors(housing loan tax breaks, interest rates).

The sector is starved of funds. As the graph below depicts, infrastructure stocks have underperformed the broader market (since Budget 2010-11) while another interest rate sensitive sector (Banking) has done far better. While domestic investors shy away from equity issuances of these firms, other options are few.

The multitude of controversies besieging the sector - LIC Housing Finance/other financial institutions ‘bribe for loans’ scam, environmental clearances delay and (now) arrest/questioning of some real estate executives on their telecom foray - has both the banks and foreign investors running scared. The graph below shows that infrastructure FDI has fallen off sharply in this fiscal.  Bank financing (for commercial real estate) became costlier from Sep-09 due to higher provision norms for those loans.

I do not pretend that all these problems can be solved within the Budget framework. Given the present political turmoil, no radical measures are expected. But some incremental expectations are:

1.    Encourage corporate bond market: Given the $1trillion infrastructure spend in the 12^th Plan, alternate financial instruments are necessary since one cannot compel banks/FDI investors to lend. Existing measures like avoiding withholding tax (on demat bonds) and encouraging retail participation (via Rs 20,000 additional rebate under 80CCF) have met with good response. I expect a hike in the limit under 80CCF, and launch of corpus for investing in these bonds (putting those forex reserves to some use.)

2.    Clarity on Vodafone ruling: Post the Vodafone ruling, investors have begun to review their positions or even take out ‘tax insurance’ for exit demands. This only increases the cost of capital of the impugned projects.  Given the nature of infrastructure (fixed to the ground), the likelihood of attracting Vodafone type tax demands is more. Given the gravity of this issue, I expect the Govt to clarify the law from prospective effect, being fair to existing investors.

3.    Use outcome based budgets to speed up project execution and payments: Given that outcome based budgets link physical progress to financial outlays (and mandate explanation for variances), it is hoped that NHAI type project delays do not recur. Given the spate of scams in 2010/11 (CWG, 3G, LIC Housing Finance), we expect that more rigorous controls will be introduced for project monitoring. This will ‘sort out the wheat from the chaff’ and positively impact efficient contractors, who presently reel under mounting Government receivables, pending projects for want of appropriate linkages etc

4.     Increase scope of ‘takeout financing’: The Indian Infrastructure Finance Company Ltd (IIFCL) will disburse INR 100BN in 2010-11. This refinancing of commercial bank debt (‘take out financing’) eases the burden of the banks who were recently cautioned by Dr C Rangarajan about their mounting exposure to the infrastructure sector. Any IIFCL specific measures (like increasing corpus, allowing issue of complex bonds) will help both IIFCL and the sector. Rather than opening the floodgates to corporate bond issuers, the Govt may decide to play safe with IIFCL specific measures.