Budget 2015-16: Infra-Debt Market to Deepen – India Ratings

By Accommodation Times News Services

Budget AnalysisIndia Ratings & Research (Ind-Ra) believes the Union Budget 2015-16’s proposals will addresses the overall concerns prevailing in the infrastructure sector. The government’s responsibility to make up for the sagging private investment in the public-private partnerships (PPP) is certainly a welcome move amid the weak investment sentiments prevailing in the sector.

Deepening Infrastructure Bond Market:  Ind Ra believes the budget commits itself towards deepening the debt market including the proposal to link long-term debt market with the infrastructure assets. The proposal to create a National Investment Infrastructure Fund (NIIF) with the government’s annual equity, the provision of tax-free status for infrastructure bonds and initiation of the bankruptcy law reform will help debt markets. The government’s intention to rebalance risks is clear with its proposal of participating in project risks –a significant step in achieving the objective of a stable, deep and well-profiled debt market. 

The committed equity from the government through NIIF will boost lending sentiments and could provide an impetus to the long term fixed interest rate debt market which is the most urgent need of the hour. We believe the tax-free status on infrastructure bonds will be available for all types of PPPs. Also, we believe the government will extend the tax-free benefit to asset-pools such as toll road and renewable energy based asset pools. 

Given the generally lukewarm response of infrastructure debt funds and infrastructure investment trusts in kindling the investor interest, the government realises that its entry in various forms could help redefine the risks and revitalise investor interest. 

The introduction of ‘plug and play’ approach means that a significant portion of completion risks will be offloaded from the private developers to be borne by the government. The lenders will bear only the appropriate risks commensurate with their returns. We view this is an essential ingredient of an effective infra-debt market. 

Thermal Power: The proposal to introduce five more ultra-mega power projects of 4,000MW each on the plug-and-play model should attract investments in the projects. While this model will certainly mitigate the implementation risks, the participation of Indian private players could be low given that the lending and equity sentiments in the sector are sagging. However, this could boost the foreign interest in the sector which will bring in the required equity and more technological inputs for timely implementation and enable efficient operation of these projects. We believe the PP approach would include clarity on the tariff pass-through mechanisms as well. 

The increase of INR100 per tonne on clean energy cess will barely make an impact on the cost of generation. 

Roads: The plug-and-play model should help projects achieve commercial operations within the stipulated time. The current construction period for most highway projects has exceeded the stipulated construction period of three years (The National Highways Authority of India’s projects) resulting in locking up of capital that has huge accumulated interest costs; consequentially classifying the assets as ‘non-performing’. With the government’s proposal to announce 100,000km of highways, with an intention to bear approval related risks, we believe newer models of concessions will find place. This will also expand the developer base in the country.

Ports: The government’s proposal to utilise land resources with respect to major ports could be a positive and is likely to be more based on the airport-type concessions. Real estate monetisation could boost revenue for major ports; however, introducing efficiency in operations will be the key. We believe corporatisation will pave way for introducing efficiency systems in port operations including autonomy in tariff fixation. 





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