India's infrastructure sector has been struggling over the last few years. Financing constraints and policy issues have been the two major road blocks. And in order to resolve these issues the government has already started taking some concrete steps. For instance, recently, the government cleared 36 infrastructure projects worth Rs 1.83 trillion to revive the investment sentiment in the country. Thus, the government is addressing the constraints that prevailed on the policy side. Apart from that, the government is also keen on addressing the financing issues which have been a key impediment.
As a step to easing financing constraints, the government is planning to set up infrastructure trusts. While banks are the primary source of finance for infrastructure projects, most of them have been wary of lending to the sector considering it is facing execution issues. As a result, the need for trusts has arisen.
An infrastructure trust will be typically funded by long term sources of funds like Employee Provident Fund Money (EPFO) money. Another striking feature of these trusts will be that the revenue from an infrastructure project which the trust has funded will go to the trust. The trust in turn will issue units to its investors. This means that the unit holder's return will be directly dependent upon the performance of the project. In other words, risk and return of the project will be directly attributed to the unit holders.
We believe that setting up of trusts will resolve the issues of infrastructure financing. Project developers will no longer have to be dependent upon bank finance which anyway was drying up of late.
There has been another noticeable change in trend for awarding projects as far as the road sector is concerned. In the past, quite a few road projects were awarded on built, operate and transfer (BOT) basis. In this mechanism the project was funded by the developer which after completion of the concession period was transferred to the government. The main drawback of this mechanism was that if the developer's financial health deteriorated the project got stuck. And this put the brakes on overall infrastructure development.
As a result, now the government is awarding most projects on engineering, procurement and construction (EPC) basis. In this mechanism, the government funds the project and the developer just builds it. Government funding ensures that liquidity constraints do not arise as frequently as is the case with projects funded by developers.
We believe that all these steps taken by the government will collectively boost infrastructure growth in the country. And this in turn will boost GDP growth which has been faltering in recent times.