Budget 2021: DFI, FPI investment in REITs; Infrastructure push a welcome step to spur economy

Even in an ordinary year, presenting a Union Budget that meets the expectations of experts, investors and common man and stimulates investment and employment generation is a hard feat to achieve.

The Union Finance Minister Nirmala Sitharaman's task in the current year to present the budget for FY22 was made incredibly tough by the COVID-19 pandemic which has caused a massive shortfall in revenue collection and deserved demand for increased allocation for healthcare, informal sector, MSME sector and a multitude of others.

Rising to the challenge, the FM has presented a reform-oriented and focussed budget in a pandemic year. There is a significant increase in healthcare and infrastructure expenditure, without any increase in taxes or imposition of COVID cess, which was widely anticipated.

Capex allocation for infrastructure is increased by 34.5% over the revised budget estimates (RE) for FY21. In addition, there is an allocation of two lakh crores to States and Autonomous Bodies for their capital expenditure purposes.

Also read: Budget 2021: Infra push can boost economy, improve competitiveness

There is a clear emphasis on the transport sector - 8500 kms of new highways in addition to 13,000 kms already awarded in FY21, railways including a proposal to set up new dedicated freight corridors, 100% electrification of broad-gauge routes, augmentation of public bus transport services for Rs. 18,000 crore and central funding for metrorail projects in Bengaluru, Chennai, Kochi, Nagpur and Nashik - in the Union Budget.

In the power sector, the proposal to put in a framework to allow choice to consumers from among more than one discoms is laudable; genuine competition in the electricity distribution segment is long overdue and should result in greater investment, efficiency and lower cost for power consumers.

Similarly, revamped liquidity support of Rs. 3.05 lakh crore over five years to discoms is welcome but similar steps such as UDAY have not yielded the desired result in the past. Therefore, it remains to be seen what kind of 'stick' the central government can wield to bring the recalcitrant discoms (which are mostly state-owned) to deliver a disciplined performance and reduce their AT&C losses.  

In order to raise resources for investments in the projects identified under the National Infrastructure Plan (NIP), the Budget has proposed significant asset monetisation steps. The proposal to enable debt investments by FPIs in REITs and INVITs is another welcome step since INVITs have increasingly become an important source for monetisation of infrastructure assets.

Central Public Sector Enterprises (CPSEs) - NHAI and PGCIL - are launching their own INVITs to raise approximately Rs 12,000 crore. Similar asset monetisation steps are planned for warehouses, dedicated freight corridors, oil and gas pipelines, transmission lines, railway infrastructure assets and airports in Tier-2 and 3 cities.

There remains some ambiguity in the airport asset monetisation programme, the budget speech says the next lot of airports will be monetised for operations and management concessions. It is not clear whether the government is rethinking airport privatisation programme through long-term operation, management and development agreements (OMDAs), the prevalent model of airport privatisation and monetisation.

Also Read: Budget 2021: Numbers more credible, achievable than previous years, says India Ratings

The proposal to set up a professionally managed Development Finance Institution (DFI) is welcome, but the devil lies in the detail. "Professionally managed" is the keyword here.  For instance, will the proposed DFI be managed by an independent board of directors or, the government nominees?

The government has announced a Rs 20,000 crore corpus for the DFI and targeted a Rs 5 lakh crore lending portfolio in 3 years' time. It is assumed that the DFI will raise the rest of the money from market borrowings.

As a government-owned entity, it can raise funds at cheaper rates but what kind of capital regulatory framework it will have to follow is to be seen. DFIs set up in the pre-1991 era (for example, IDBI and ICICI in the past) had to be converted into universal banks due to poor financial health. In its new avatar, the governance and regulatory framework put in place for the proposed DFI will be a key determinant for whether it succeeds in its objectives.    

Announcement of a permanent institutional framework to buy investment-grade corporate bonds both in normal and stressful situations is another positive step and will help deepen the bond market and increase the fund-raising options for infrastructure projects. However, the limitation of investment-grade securities may prevent secondary buying in case of stressful situations.

While there is no plan to privatise major ports, part of their operational services is to be opened to private-sector participation through the PPP route, akin to the planned induction of private sector participants in operating passenger train services.

In the oil and gas sector, the budget has announced the setting up of an independent Gas Transport System Operator (GSTO) for facilitation and coordination of booking of common carrier capacity in natural gas pipelines on a non-discriminatory open access basis.

This is a key regulatory reform measure which would enhance efficient utilisation of the country's gas transport infrastructure. GAIL (India) Ltd, which is the largest gas pipeline owner and operator in the country, performs this function currently and there was a clear need to entrust the responsibility to allow open access to pipeline capacity to an entity different from the pipeline owner and operator.

While there are a lot of positive and bold steps in the Union Budget 2021, few missed opportunities include setting up a dedicated tribunal for dispute resolution in other infrastructure sectors (similar to the power sector), though the introduction of mandatory conciliation to resolve disputes is a forward step.

More support could have been announced for a green economy such as electric vehicles adoption and charging infrastructure for personal and public transport. Overall, the Union Budget for 2021-22 admirably rises to the challenge of creating an enabling environment to deliver on the promise of National Infrastructure Pipeline in the next few years.

(The author is a Partner at Cyril Amarchand Mangalds, New Delhi. He specialises in Project Finance, Infrastructure Projects and Electricity Regulation.)