The new Economic Policy of Govt. of India has culminated in for reaching reforms, both at Central and State levels. For the magnitude of investment flows into the infrastructure sector, it is necessary that, there is :
- Increased commercialisation of infrastructure services, and
- Appropriate level, regulatory and administrative frameworks to support both foreign and domestic private sector involvement are evolved.
To achieve the above, 5 key strategies are to be borne in mind:-
8.1 Need For Commercial Orientation
The financial institutions, while financing infrastructure projects, should operate with objective of being profitable, rates and fees charged should be market-based. The institution should also develop the quality of staff necessary to ensure high credit analysis and quality.
8.2 Value Addition And Innovation
It is necessary to enhance the capabilities of existing infrastructure financing. This can be done by introduction of innovative financial products in the Indian Capital Market like subordinated loans, take-out financing, stand-by financing, loan purchases from existing lenders, partial credit guarantees, underwriting infrastructure bond issues, asset securitisation and financial guarantees.
8.3 Public Policy On Infrastructure
There is a requirement of rationalising level and regulatory frameworks to encourage private sector participation. Besides this, removal of the structural risks is important for flow of private capital into infrastructure. The first objective would be to bring all the delayed projects to financial closure. A significant part of which are in the pipeline would then go on-stream.
8.4 Long Term Debt Market
The term lending institutions in India typically extend loans for 7 to 10 years, matching their tenure of funds. While infrastructure projects will require tenures of 10 to 15 years, the long tenure of funds required coupled with high rists and sensitive to costs make the traditional way of financing not only requires capital for long period but also attempt to share the risk amongst all concerned participants. Growth and development of the long-term investors like insurance companies and provident funds are required.
8.5 Global Best Practices
To emulate and follow the developed countries examples who are into commercialisation of infrastructure for quite sometime. To follow their system of corporate governance, operating policies, and risk management.
8.6 Recommendations
(1) Autonomy
Autonomy and delegation of adequate powers to the Port Trusts would facilitate speedy development of the ports. According to Section 92 of the Major Port Trusts Act, no expenditure could be charged by the Port Trust Boards to the capital account without the previous sanction of Central Government. Going through this procedure, delays project approval. Hence suitable legislation for delegation of powers to incur capital expenditure by the Port Trusts may be done. Similarly, a per Section 27 of Major Port Trusts Act, 1963, the power to create posts at the higher level and for their remuneration lies with the Central Government even though the ports may be autonomous. This cannot work for ports that are commercial organisations. So again, legislative change is required in this aspect.
(2) Private Sector Participation
The Government Policy on privatisation has been not to lease out existing assets to the private sector but generally go for construction of additional assets. This unnecessarily restricts the scope of private sector participation and flow of private investments. There is a need to change the policy in such a way that leasing of existing assets can be considered provided, it leads to upgradation/augmentation of the asset and to higher productivity.
The prospective private sector entrepreneurs need to know the following:-
(a) Major Ports Act 1963 mandates that the schedule of Charges
to be recovered, shall have prior sanction of the Govt.
(b) The charges to be levied need to be within the limits determined
by the Govt.
(c) Private entrepreneur who takes over the port facility will
have to guarantee a minimum level of performance.
(d) The existing Labour Laws will continue to apply. Amendments
to the Major Ports Act, 1963 is necessary to permit projects
under BOT basis and also relaxation of points (a) and (b) above,
so that the charges could be left to market forces.
(3) Labour
The most controversial issue in the port privatisation is the labour issue, as the labour resistance could become the primary impediment. MajorGovernment intervention is required for any privatisation process. The present Government Policy on Labour is:
- The existing labour in ports and Dock Labour Boards (DLBs) cannot be reduced except by retirment or by VRS process.
- The labour hired by private firms will be subject to Labour Laws and will be treated at par with the existing labour.
- Private firms are not bound to hire Govt. labour, but, in case of stevedoring, it is compulsory to hire DLB labour.
- Private firms will be free to have their own compensation package, but it cannot be less than the stipulated wages for the industry.
Thus, the Labour Policy is detrimental to privatisation, as the private operator would like to hire its own labour and not from the DLB. It would also like to have an easy entry and exist policy. In India, there are several pockets of excess labour in ports. Modernisation would call for more of skilled labour and also reduction in the work-force. So, suitable legislation and changes in Labour Laws is required for smooth privatisation of ports.
(4) Regulatory Authority
Privatisation will give rise to a large number of contractual agreements. Issues relating to pricing and conditions governing these contractual agreements require and independent regulatory authority for control. In line with the Telephone Regulatory Authority of India (TRAI), a similar body could facilitate the final decision making by the Ministry. The existing Port Trust Act is to be amended accordingly for creation of this regulatory authority.
(5) Fiscal Incentives
Attracting equity capital for infrastructure projects would be difficult in view of long gestation period and high level of risk. Hence, it is essential to introduce certain fiscal incentives like.
- Equity investment in infrastructure projects be allowed tax incentives like the88cc provisions.
- Dividends payable on equity be made cumulative for payment till the project goes on-stream. This would enable ploughing back the profits and reduce the requirement of borrowed funds.
- Suitable changes be made in the Income Tax Act to provide for sharing of depreciation charges.
- Channelisation of Insurance, Provided Funds and Pension Funds into long-term debt securities of infrastructure projects.
(6) Exit Route for Financial Institutions
Since retail investors in India are basically risk-averse and infrastructure projects carry high level of risk in the construction and pre-operative stage, an innovation could be thought of. The banks and financial institutions could lend money at this stage and the same could be refinanced with long-term securitised debt once the project is completed. The swap into bonds or other securities after project completion would enable the Banks / FIs to recycle the funds into other projects. Thus, the FIs/Banks bear the risk during the riskier construction and preoperative stages and the promoting company does not face problem in funding. This would, however, need the growth and development of the secondary debt market.
(7) Using Govt. Funds as Venture Capital
The plan allocation of the Govt. compared to the requirement is very poor. This calls for optimal and effective use of the funds. Govt. can use the funds as a venture capitalist by taking equity position in the project and then opting out by selling the equity, once the project goes on-stream. So by this process of investment and disinvestment, Government funds could be utilised optimally.
(8) Asset Securitisation
Securitisation is defined as a sale of an asset by its original investor, where the asset can be any illiquid financial asset. For FIs and Banks, securitisation of infrastructure loans offer manifold advantages. It provides additional source of funds, reduces funding costs, economy in the use of capital, greater re-cycling of funds and improves capital adequacy. In Indian context, securitisation has not emerged as a viable technique due to following negative factors:
- Securitisation attracts Stamp Duty under Transfer of Property Act, 1882 and the duty is as high as 13% to 17% in some States.
- It also attracts heavy registration charges and incidence of double Income Tax.
- The accounting treatment for securitised assets in the Lender’s books is another grey area. If it has to be treated as an outright sale of the assets or as an off-balance sheet item, is not clear.
So removal of these legal and fiscal irritants would make securitisation as a vehicle of financing infrastructure projects, in the coming future.
(9) Setting up of Specialised Financial Intermediary
Going by the complexities of infrastructure project funding, there is reason to consider creation of a specialised lending intermediary which can help to kick-start the Indian debt market for infrastructure financing. The intermediary can inspire enough confidence amongst capital market investors to induce them to lend long-term funds at lowest possible market rates. Such institution promoted by the Government lends creadibility to the market. In India, Infrastructure Finance Development Company Limited (IFDC) for promoting infrastructure investment has been set up on 30th January, 1997 at Chennai. The mission of IFDC is to nurture the growth of private capital flows for infrastructure finance on a commercially viable basis. It is expected to commence operations shortly.
Investments in infrastructure – both public and private – are just beginning to assume serious proportions. While specialised financial institutions are gearing up to face the magnitude of financing requirements, the banking system is yet to step into the fray. But, as bankability issues are resolved, the pace of investment in infrastructure by the commercial banks will grow and it is imperative that adequate knowledge and expertise is built up right now.