Infrastructure revolution offering huge opportunities

By Gautam Khaitan and Nidhi Mathur, OP Khaitan & Co
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India’s infrastructure sector is going through a significant transformation. Investment in infrastructure is envisaged to double from US$500 billion in 2012-13 to US$1 trillion in 2017-18, with about half of this to be achieved through private sector investment.

Reasons to invest include: (i) expected economic growth of 7-7.5% despite the global downturn; (ii) few restrictions on foreign direct investment (FDI) for infrastructure projects; (iii) a 10-year tax holiday available to enterprises engaged in the development, operation and maintenance of infrastructure facilities, subject to compliance with the prescribed conditions; (iv) opening up of the infrastructure sector through public-private partnerships (PPPs).

Growth areas

Nearly all of the infrastructure sectors present excellent opportunities, with staggering sums of investment planned for roads and highways, ports and airports, railways and power. Most of the infrastructure projects in India are run through PPP mode in one of its forms such as BOT (Built Operate Transfer), BOLT (Build Operate Lease Transfer), etc. PPPs are gaining in importance, and are benefiting from government support. Many multinational companies already have equity participation in PPPs, with companies based in Malaysia, the UK and Mauritius being the significant ones.

Gautam Khaitan
Gautam Khaitan

The government and Indian companies are on the lookout for foreign investors with good technology and explore opportunities in the area of road and highway building, gas pipelines, urban infrastructure, health and education, building equipment, real estate, construction services, building material, etc.

Some of the projects being envisaged currently are: (i) the Delhi Mumbai Industrial Corridor, which will require an investment of about US$90 billion; (ii) the construction of 20,000 kilometres of new and upgraded roads over the next five years; (iii) US$250 billion in investments in electricity plants and power grids. In Mumbai, an elevated freight-rail corridor, a new airport and a trans-harbour link are being worked on.

Investment policy

As per the consolidated FDI Policy, 2013, issued by the Department of Industrial Policy and Promotion, under the Ministry of Commerce and Industry, the government allows FDI up to 100% under the automatic route in townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city and regional-level infrastructure), subject to various guidelines. To encourage the flow of foreign funds into the infrastructure sector, the Finance Ministry has further allowed foreign institutional investors to invest in unlisted companies.

Facing realities

Some infrastructure projects have encountered delays in land acquisition and commissioning because the land acquisition bill remained stalled in parliament for a long time. The bill was passed recently, which might bring some respite.

Delays in environmental clearances and permissions from local authorities also cause bottlenecks. The lack of a single window clearance mechanism and bureaucratic delays at multiple levels remain a major roadblock to in the execution of infrastructural initiatives.

Nidhi Mathur
Nidhi Mathur

Other bottlenecks result from strict regulations and lack of clarity over mining. Projects may also face transportation problems as the increase in road networks has been less than expected. Despite having huge coal resources in the country, a large proportion of coal for the power sector and other key areas is imported, which leads to various issues arising out of rupee volatility and import policy changes.

Companies looking to capitalize on the situation need to plan their strategy for entering the market carefully. Understanding the local market, including selecting complementary local partners, is vital. Substantial tax benefits are provided for infrastructure projects but developers need to be savvy about structuring their contracts. Good tax planning can have a decisive impact, especially in bidding situations. This will also help to avoid unnecessary litigation at later stages.

Conclusion

India’s rising growth trajectory requires the support of rapidly expanding infrastructure facilities. The government recognizes that domestic resources alone may not be adequate to sustain the required expansion in infrastructure. Thus it is following a strategy to create incentives for FDI. Today India has an extremely liberal regime for FDI in terms of entry norms. The government has taken systematic initiatives to address the problems largely through comprehensive reforms in sectors such as power and telecommunications. The combination of domestic private foreign investment and multilateral investments is likely to propel India’s economic growth momentum in future.

OP Khaitan & Co is a 40-lawyer law firm, based in New Delhi. Gautam Khaitan is the firm’s managing partner and Nidhi Mathur is a junior partner.

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