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Beyond the budget
July, 20th 2009

A series of key interventions are required if the infrastructure market is to take off.

The finance minister made two remarks at the start of the Union Budget address on July 6, 2009. First, that one budget cannot solve all the nations problems. Second, that the budget is not the only vehicle to effect changes.

In the spirit of his observations, the Indian infrastructure sector seeks to engage with the Finance Ministry specifically, and the Government of India generally, beyond the budget.

The issues that need active engagement can be placed in four buckets.

Taxation Issues
The finance ministry will, sooner or later, have to take a position on Section 80-IA. This is the section that allows a 10-year tax holiday to infrastructure developers. The sunset clause kicks in pretty soon and industry would be happy to see this scheme being kept alive for another 10 years. (In this budget, only the power sector has been given a one-year extension, which is neither here nor there.) The scheme should be valid even after corporate restructuring, as well as expanded to include brown-field projects, and not just greenfield ones brown-field relates to older projects going in for substantive upgradation, modernisation or redevelopment. And if this 10-year tax holiday is to be meaningful, then it is logical to not have MAT applicable in the chosen 10 years, much less have it increased from 10 per cent to 15 per cent!

The other issue that begs reconsideration is the tax incentive for commercial lenders to infrastructure, popularly known as 10 (23 G). This was withdrawn by P Chidambaram when he was finance minister, as part of his clean-up drive on exemptions. It gives a tax-holiday on the spread in infrastructure lending, thus making lending more attractive.

The Dividend Distribution Tax (DDT) has been debated threadbare. Infrastructure developers typically have three-four layered structures to hold and execute projects in Special Purpose Vehicle (SPV) formats. Providing a full pass-through of DDT would make life significantly simpler.

Another peculiarity of the infrastructure sector is that most infrastructure-project SPVs are unlisted and thus subject to long-term capital-gains tax on sale of their equity holding. Considering unlisted infrastructure SPVs in line with listed counterparts with zero-tax burden seems appropriate.

The service tax regime, currently applicable on operations and maintenance, needs re-examination.

Financial markets
The creation of the Indian Infrastructure Finance Company Ltd (IIFCL)was widely welcomed. Its existence as a 100 per cent government-owned vehicle, enjoying sovereign guarantee benefits and privileges was expected to provide a great fillip to longer tenure, and cheaper financing options. However, IIFCLs mandate has been too narrowly defined. For example, IIFCLs current mandate is to lend/refinance only to PPP/bid-out projects. Increasing access, such as allowing IIFCL to refinance infrastructure NBFCs, (not just commercial banks), invest in securitised papers of infrastructure projects and companies, look beyond PPP/bid-out projects etc has have been a well-voiced demand. In this budget, the finance minister has partly addressed this need by allowing IIFCL greater flexibility in take-out financing and refinancing commercial banks. However, more breadth and depth are required in its operations.

There is need to critically examine the possibility of a separate class of NBFCs called infrastructure NBFCs. They should be encouraged and regulated under a separate set of guidelines that would enable them to emerge as dynamic finance providers.

Unshackling the many simultaneous constraints for infrastructure lending by commercial banks is worth considering.

Harmonising and implementing a common definition for infrastructure across various government agencies and regulations would remove confusion and anomalies.

Creating a long-term debt-market for infrastructure has been discussed many times. Three seminal contributions the Deepak Parekh Committee Report, the Percy Mistry Report and the Raghuram Rajan Report await action on their well-thought- through suggestions in this area.

Delivery and implementation
All discussions in the media either during the run-up to the general elections or at the time of the Union Budget ultimately converged on the aam admi demanding delivery, performance and implementation. Very clearly, outcomes are now more important than outlays. This budget has once again seen a huge step-up in outlays 23 per cent increase for National Highway Authority of India (NHAI), 87 per cent for Jawaharlal Nehru National Urban Renewal Mission (JNNURM), 59 per cent for Pradhan Mantri Gram Sadak Yojana (PMGSY), 45 per cent for Bharat Nirman, 160 per cent for Accelerated Power Development Reforms Programme (APDRP) etc.

CII has suggested setting up National Infrastructure Facilitation and Monitoring Agency (NIFMA) under the auspices of the Prime Ministers Office, to sort out tangles and bottlenecks in the implementations of projects at the central and state levels. The same agency should adopt 20 cross-sectoral projects of national importance and commit on-time, within-cost delivery.

The finance minister, in his interaction with chambers of commerce on July 7, 2009 went a step further. He informed the gathering that he was in favour (and had apparently discussed with the prime minister) of the idea of having a National Development Council for Infrastructure with the prime minister in the Chair and the participation of all chief ministers, to address infrastructure logjams on a war-footing. A very powerful idea indeed!

Initiatives that merit pushing
Some bold and new brush-strokes are also required on the infrastructure canvas. Here are five suggestions:

The need for a fresh legislation to create truly independent regulatory authorities for various infrastructure sectors has been clearly recognised, but not pushed politically. The time has come.
 
The setting up of central- and state- level land bank corporations, could be an important component of a long-term solution for the vexed issue of land acquisition for economic development.

The creation of 20 Domestic Economic Zones (DEZ) as part of a calibrated urban rejuvenation effort is a powerful idea for a new growth stimulus; and can build on the lessons from the special economic zones (SEZ) policy.

Pushing the 74th Amendment to the Constitution for urban reform is critical, as otherwise our towns and cities will never be able to manage their own destinies as the 74th amendment envisages.
 
Utilising PPP models, particularly the annuity scheme in rural infrastructure, for galvanising private sector involvement in projects in irrigation, mandis, cold chains, roads, is clearly desirable.
Finally, the introduction of a Infrastructure Budget day instead of a Railway Budget day would be welcome, and remove a visible symbol of a colonial legacy.

The author is the Chairman of Feedback Ventures. He is also the Chairman of CIIs National Council on Infrastructure. The views expressed here are personal.

 
 
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