Infrastructure policy: In the right direction

Reviving the infrastructure growth engine, the Central government is now addressing policy issues that had earlier led to slow pace of awarding and implementation of infrastructure projects. Crisil Research takes a peek at some of the major policy revisions that are expected to ratchet the capacity addition over the next three-five years.

In the road sector, projects were largely delayed due to land acquisition issues. To expedite the execution of these projects, National Highway Authority of India (NHAI) will now hand over possession of 80 per cent of the land by letter of award instead of the previous 50 per cent. Also to ensure timely availability of funds for construction, NHAI will award grants during the construction period rather than after the commercial operations date. Also, the toll revision policy has been modified to make projects more attractive to private sector players. Consequently, Crisil Research expects the pace of road construction activity to scale up to about 12 km a day going forward from 7 km a day seen in the recent past.

In the power sector, CERC has increased the return on equity for projects of central utilities from 14 per cent to 15.5 per cent and an additional incentive of 0.5 per cent for timely execution of projects. The government has also provided income tax benefits under section 80IA and tax incentives for import of equipments for mega power projects. Crisil Research expects these incentives along with speedier execution to propel the generation capacity addition to 9-10 Gw per annum over the next few years as compared to the average 4-6 Gw per annum witnessed in the recent past.

The government’s effectiveness in channelising long term funds towards infrastructure and providing refinance has been another key challenge. The government has approved refinance/take-out financing of up to Rs 1 trillion through IIFCL and there is also a proposal to set up a dedicated fund – India Infrastructure Debt Fund – of about Rs 500 billion to ensure availability of long term funds for these projects.

These changes in the policy environment and the government’s thrust on infrastructure are likely to result in faster execution of projects. According to the revised estimates of the eleventh five-year plan (2007-2012), infrastructure investments are expected to increase to Rs 20 trillion compared to Rs 9 trillion in the tenth plan (at 2006-07 prices). While actual investment numbers are expected to be slightly lower than the revised plan numbers, it is still a vast improvement from the earlier period. Consequently there would be increased opportunities for engineering procurement and construction players, who have strong execution capabilities. Also, many new projects are expected to be awarded on build-operate-transfer basis, which would provide attractive returns over the long term as long as players are able to enhance their management bandwidth and increase their funding capabilities.

The author is the head Crisil Research