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Construction : Cover Story | November 2017 | Source : Infrastructure Today

Infrastructure assets provide better risk returns

With banks having limited appetite to fund infrastructure projects, raising funds through retiree money is a win-win proposal for developers and investors, suggests Karunakaran Ramchand, Managing Director, IL&FS Transportation Network.

The government is considering raising money from provident fund (PF) beneficiaries to fund infrastructure projects. Is it running out of ideas?
If the Indian economy needs to sustain its growth momentum in the coming decade, developing world-class infrastructure facilities is of paramount importance. Traditionally in India, a significant portion of debt requirement for financing infrastructure has been met by borrowing from domestic banks. However, banks have limited appetite for funding infrastructure projects due to longer gestation period and for being weighed down by the risk of asset-liability mismatch. Another issue is that most of the greenfield infrastructure projects do not secure a high credit rating, which makes it difficult to raise external funding. As of now, bank credits have become a trickle for financing long-term, large infrastructure projects. We believe it is a welcome move to raise long-term funds available with provident fund.

Subsequently, will raising funds through retiree money be enough to meet the actual demand? Is it a win-win proposal for both developers and investors? Why?
Raising funds through retiree money is a win-win proposal for developers and investors because there is a neat fit between the long-term horizon for the infrastructure projects to mature and retiree money portfolio. Investment in the infrastructure sector can be an advantage to the extent that infrastructure assets provide better risk return features coupled with long maturities. These assets have greater cash flow stability when the project matures. Developers can find this relieving due to the current restrictive commercial bank capital requirements.

How successful will the implementation of instruments such as bond market, masala bonds, InvIT, infrastructure development fund and national investment and infrastructure fund be?
Our debt market is in its nascent stage; our financial system lacks large, active and liquid debt market. The government has been keen on encouraging the growth of masala bonds. However, it has been challenging to offshore masala bonds due to foreign holding limits coupled with capital control regime, which aims at maintaining currency stability. In case of InvIT, the issues investors face are the two major amendments made to the Income Tax Act, 1961 by the Finance Act, 2017. First, the insertion of clause x in section 56(2) of the Act provides that receipt of money or specified property by any person for inadequate consideration or without consideration from any person shall be subject to tax in the hands of the recipient.

Second, the introduction of section 50CA in the Act to provide that where consideration for transfer of shares of a company other than a quoted share is less than the Fair Market Value (FMV) of such a share, the FMV determined as per the rules shall be deemed to be the full value of consideration for computing income under the head, 'capital gains.'

The intent of the captioned provisions are appropriate, as they primarily seek to address tax avoidance in private transactions on transfer of unquoted equity shares at less than Fair Market Value (FMV). However, the applicability of the above sections on genuine, transparent and bonafide infrastructure transactions involving establishment of InvITs and resolution of stressed assets leads to certain adverse and unintended tax consequences.

How exciting is the new toll-operate-transfer (TOT) model introduced by the government? Do you think bidders with access to low cost debt are likely gainers in TOT auctions?
TOT model is new to India, but it has been successfully implemented on projects with long-term concessions like Chicago Skyway, Indiana Toll Road, etc. Under this model, national highway projects that have been operating for at least two years and generating a steady stream of revenue will be leased out to investors for operations and maintenance; the consideration would be the highest bid upfront concession fee. The corpus generated from the proceeds of such project monetisation can be utilised by the government to meet its fund requirements for future development and operation and maintenance of highways in the country, and to address development of highways in unviable geographies. The advantage of this model is that investors are free from construction risks and they can look at brownfield road assets holding lower risks. This model can be ideal for international institutional investors who have long-term investment appetite and for bidders who have access to low cost debt.

The road minister may be aiming to award about 80,000 km of highways in the next five years. How much of investment would this entail and what would this mean for the company?
Over the years, ITNL has emerged as the leading surface transportation infrastructure company and one of the largest private sector BOT road operators in India. Our mandate is to help drive India's socio-economic empowerment through the creation of roads, highways, tunnels and bridges. We have gradually expanded our engineering procurement and construction (EPC) footprints with 444 lane km under our portfolio and we are L1 for the 14 km Zojila tunnel EPC project. Zojila pass is situated at an altitude of 11,578 feet on Srinagar-Kargil-Leh national highway. Bhartmala project, the second largest highways construction project, with potential investment to the tune of Rs 6.9 lakh crore and anticipated development of 83,000 km by 2022, is definitely a tremendous opportunity in the near term and long term for the company.

- Rahul Kamat

 
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