Infrastructure sector needs easy global finance capital
World Bank statistics show that from 1990 as much as $51 billion of public and private investment has been invested into various projects. Business of cricket
By Gaurav Taneja, |
India, despite an annual growth rate of 9% which is expected to improve further, has only recently come to terms with the fact that to meet the basic infrastructure needs of its population, reliance cannot be placed on public finance alone. Over the past several years, the private sector has effectively participated, and it can do much more if certain key issues facing public-private partnerships (PPPs) are resolved.
Let us capture the past performance. According to a joint report by the government of India and ADB, as of December 2006, as many as 86 PPPs had been awarded mainly in roads and ports. The World Bank statistics show that during a 15-year period from 1990 as much as $51 billion of public and private investment has been invested into various projects.
This could not have been attained without the government’s keenness to partner with the private sector. Recently, the finance ministry has finalised a panel of professional and independent advisors to work out the technical and economic aspects of infrastructure projects before offering the same to the private sector for development.
In the recent past, the government has replaced negotiated contracts with competitive bidding, streamlined the contract award process, created model concession agreements for private investment in highways and major ports and standardised bid documents for investment in the power sector. Various competent authorities have undertaken initiatives to rationalise tariffs or user fees, a key imperative to enable future private investment. State governments have also taken the initiative to introduce specific state-level legislation, governing the award and implementation of privately-funded infrastructure projects within their jurisdiction.
In India, as in several other countries, there is no single definition of PPPs. The term encompasses long-term contractual partnerships between the public and private sector agencies to finance, design, implement and operate infrastructure facilities that traditionally have been the domain of the public sector. In some instances, the entire project can be funded by the private sector, akin more to the private sector investment mechanism than a joint partnership.
In general, in such projects, investors form consortiums to bid on contracts. A special purpose vehicle (SPV) is then set up to finance, build and operate an asset, or finance, refurbish and operate an existing asset. Typically, SPV does not own the underlying asset but leases it from the public entity under a long-term lease of several years. Where actual construction of the asset (say a bridge) is involved, the SPV contracts with an engineering, procurement and construction (EPC) contractor for building the bridge and finances a significant part of the construction costs with debt, which is generally of a limited recourse nature to the SPV owners. Post-construction, payments from the public sector partner, or fees from the users of the bridge or both, are allocated towards servicing the debts and paying the private partner as per the contractual terms.
For PPPs to widen in reach and popularity and to enable the country to channelise more capital into the infrastructure sector, some key issues need to be addressed, viz:
Standardisation & co-ordination
Different sectors, such as highways, ports, water, power, etc, are managed by separate ministries and communication among ministries is fragmented. Pick up any sector and you will find that there are further Centre and state-level jurisdictions. For e.g., the ports sector is divided into ‘major ports’ and ‘minor ports’, which are under the jurisdiction of the Centre and state, respectively.
Central and state-level agencies tend to use different formats, bidding procedures, agreements and there seems to be little standardisation even at the execution level. Preferably, a single unit should be set up to act as a nodal point for facilitating co-operation among different ministries and tiers of government. Standardisation is desirable in the entire process, including bidding and awarding of the projects. This will help cut time and cost inefficiencies.
Resolving Tax issues
There is tax holiday for specified periods for enterprises engaged in specified infrastructure facilities under section 80-IA of the Income-Tax Act, 1961. However, a strange anomaly exists. Even infrastructure projects are subject to the levy of minimum alternative tax (MAT) during their tax-holiday period, resulting in paradoxical tax inefficiency. This anomaly appears even more striking in projects structured with lease, grant or annuity payments from government to the private developer, as MAT merely results in private investors seeking higher grants or payments to offset MAT costs. There is a strong case for abolishing the applicability of MAT to infrastructure projects eligible for such tax holidays.
Regulatory & financial changes
In most infrastructure sectors, government approval is not required for foreign direct investments of up to 100%. However, our regulatory framework tends to be unfriendly towards efficient use of foreign capital. For example, current regulatory guidelines make it difficult for foreign developers to recycle and re-deploy capital locked into infrastructure concessions through efficient debt refinancing or securitisation. Perpetual lock-ins of capital through statutory reserve norms appear somewhat irrelevant for infrastructure concession companies, as do the accounting standards on deferred tax — mainly because an infrastructure project, once implemented, tends to have a fairly predictable cash-flow stream from a single source, and most infrastructure project companies are single-asset, single-purpose and closely-held entities.
Restrictions on issue of FCCBs by unlisted companies and restrictions on unlisted domestic companies in accessing international stock exchanges such as AIM are possibly not warranted in the infrastructure sector. Tough ECB norms make it difficult to access funding for infrastructure-concession-holding companies or refinancing of concessions. In general, there is a need to ensure that the overall regulatory framework, which may be relevant for manufacturing and service companies, is applied selectively to infrastructure sector only wherever relevant.
For India to march ahead on the PPP path, there would be a need to create right institutional set-up, including introduction of model concession agreements for key sectors and capacity building at the government level to enable this sector to prioritise, plan, appraise, structure and close PPPs. There is also a need to ensure that our commercial regulatory framework accommodates smooth flow of international capital into this sector and recognises its specific and unique needs.
(The author is national tax director and partner, Ernst & Young India)
Let us capture the past performance. According to a joint report by the government of India and ADB, as of December 2006, as many as 86 PPPs had been awarded mainly in roads and ports. The World Bank statistics show that during a 15-year period from 1990 as much as $51 billion of public and private investment has been invested into various projects.
This could not have been attained without the government’s keenness to partner with the private sector. Recently, the finance ministry has finalised a panel of professional and independent advisors to work out the technical and economic aspects of infrastructure projects before offering the same to the private sector for development.
In the recent past, the government has replaced negotiated contracts with competitive bidding, streamlined the contract award process, created model concession agreements for private investment in highways and major ports and standardised bid documents for investment in the power sector. Various competent authorities have undertaken initiatives to rationalise tariffs or user fees, a key imperative to enable future private investment. State governments have also taken the initiative to introduce specific state-level legislation, governing the award and implementation of privately-funded infrastructure projects within their jurisdiction.
In India, as in several other countries, there is no single definition of PPPs. The term encompasses long-term contractual partnerships between the public and private sector agencies to finance, design, implement and operate infrastructure facilities that traditionally have been the domain of the public sector. In some instances, the entire project can be funded by the private sector, akin more to the private sector investment mechanism than a joint partnership.
In general, in such projects, investors form consortiums to bid on contracts. A special purpose vehicle (SPV) is then set up to finance, build and operate an asset, or finance, refurbish and operate an existing asset. Typically, SPV does not own the underlying asset but leases it from the public entity under a long-term lease of several years. Where actual construction of the asset (say a bridge) is involved, the SPV contracts with an engineering, procurement and construction (EPC) contractor for building the bridge and finances a significant part of the construction costs with debt, which is generally of a limited recourse nature to the SPV owners. Post-construction, payments from the public sector partner, or fees from the users of the bridge or both, are allocated towards servicing the debts and paying the private partner as per the contractual terms.
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For PPPs to widen in reach and popularity and to enable the country to channelise more capital into the infrastructure sector, some key issues need to be addressed, viz:
Standardisation & co-ordination
Different sectors, such as highways, ports, water, power, etc, are managed by separate ministries and communication among ministries is fragmented. Pick up any sector and you will find that there are further Centre and state-level jurisdictions. For e.g., the ports sector is divided into ‘major ports’ and ‘minor ports’, which are under the jurisdiction of the Centre and state, respectively.
Central and state-level agencies tend to use different formats, bidding procedures, agreements and there seems to be little standardisation even at the execution level. Preferably, a single unit should be set up to act as a nodal point for facilitating co-operation among different ministries and tiers of government. Standardisation is desirable in the entire process, including bidding and awarding of the projects. This will help cut time and cost inefficiencies.
ADVERTISEMENT
Resolving Tax issues
There is tax holiday for specified periods for enterprises engaged in specified infrastructure facilities under section 80-IA of the Income-Tax Act, 1961. However, a strange anomaly exists. Even infrastructure projects are subject to the levy of minimum alternative tax (MAT) during their tax-holiday period, resulting in paradoxical tax inefficiency. This anomaly appears even more striking in projects structured with lease, grant or annuity payments from government to the private developer, as MAT merely results in private investors seeking higher grants or payments to offset MAT costs. There is a strong case for abolishing the applicability of MAT to infrastructure projects eligible for such tax holidays.
ADVERTISEMENT
Regulatory & financial changes
In most infrastructure sectors, government approval is not required for foreign direct investments of up to 100%. However, our regulatory framework tends to be unfriendly towards efficient use of foreign capital. For example, current regulatory guidelines make it difficult for foreign developers to recycle and re-deploy capital locked into infrastructure concessions through efficient debt refinancing or securitisation. Perpetual lock-ins of capital through statutory reserve norms appear somewhat irrelevant for infrastructure concession companies, as do the accounting standards on deferred tax — mainly because an infrastructure project, once implemented, tends to have a fairly predictable cash-flow stream from a single source, and most infrastructure project companies are single-asset, single-purpose and closely-held entities.
Restrictions on issue of FCCBs by unlisted companies and restrictions on unlisted domestic companies in accessing international stock exchanges such as AIM are possibly not warranted in the infrastructure sector. Tough ECB norms make it difficult to access funding for infrastructure-concession-holding companies or refinancing of concessions. In general, there is a need to ensure that the overall regulatory framework, which may be relevant for manufacturing and service companies, is applied selectively to infrastructure sector only wherever relevant.
For India to march ahead on the PPP path, there would be a need to create right institutional set-up, including introduction of model concession agreements for key sectors and capacity building at the government level to enable this sector to prioritise, plan, appraise, structure and close PPPs. There is also a need to ensure that our commercial regulatory framework accommodates smooth flow of international capital into this sector and recognises its specific and unique needs.
(The author is national tax director and partner, Ernst & Young India)
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