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Focus needs to be on creatng hard and soft infra
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SME Times News Bureau | 13 Apr, 2019
It is crucial for the government to keep pushing towards more effective
growth-oriented policy framing and implementation in India.
The
focus must be on creating both "hard" and "soft" infrastructure while
facilitating effective debt usage. Hard infrastructure must see a
continuation of the progress seen in areas such as highway construction
and the gradual increase in participation of deep-pocketed institutional
investors in owning assets. Soft infrastructure pertains to assets that
help create demand for hard infrastructure assets.
Airline
businesses would be an example of soft infrastructure that is so
essential for robust demand for airport assets. Ensuring that both hard
and soft infrastructure asset creation pick up further pace is vital.
The
need to push along with creating new hard infrastructure assets such as
airports, highways, energy generation & distribution etc. is
evident given the trend of higher consumption. The critical aspect that
needs to be kept in mind is a "sustainable" path of creation is much
more likely to deliver long-term benefits than a rapid approach with
pitfalls along the way.
In layman's terms, effective project
planning, efficient project implementation and prudent usage of debt
funding in the hard infrastructure creation process will be of vital
importance.
In the recent past, active participation by
capital-rich large institutional investors in the highways and renewable
energy sector in India shows the demand for such assets. That said, the
two Toll-Operate-Transfer (TOT) highway auctions by the National
Highways Authority of India (NHAI) are symbolic that investors will be
aware of both asset price and quality. While the first TOT auction saw a
winning bid that was much higher than expected, the second auction had
to be cancelled since the highest bid wasn't where the NHAI expected the
bid price to be. The key takeaway is that investors would be discerning
regarding asset quality and pricing. The government must make sure that
the investment momentum sustains while learning a few lessons from the
TOT auctions.
Creating soft infrastructure is as important as
creating hard infrastructure. Soft infrastructure are assets that
perhaps do not fit the traditional definition of infrastructure assets
but are essential pillars of economic growth, primarily as soft
infrastructure such as airlines create demand for hard infrastructure
assets such as airports.
The recent turmoil in the airline
sector further emphasises the need to create policies that help boost
the sector. While it is true that any industry is subject to the
travails of the business cycle, and this is especially true for airline
businesses, it is also essential that all steps from a policy
perspective are taken to ensure that the sector can thrive. A vibrant
airline sector translates into greater usage for airport assets, thereby
boosting the demand for airport infrastructure. Higher demand for
airport infrastructure from the investment community can hopefully
translate into a robust infrastructure creation pipeline for the sector.
One of the crucial linkages between efficient creation and
operation of both hard and soft infrastructure is optimal debt usage. It
is important to note that debt in itself is only as good as its usage,
implying that prudent use of debt for businesses delivers value for the
ecosystem. On the contrary, excessive debt usage, especially for
businesses unsuitable for debt usage can lead to results that aren't
suitable.
The assertion that "capital structure risk must be
inversely proportional to business risk" is one that merits attention.
The statement mentioned above implies that debt is more useful for
businesses that have access to steady cash flows as opposed to companies
that have higher variability of cash flows. So, in general, a utility
business would be more suitable for debt usage than say a retail
business. The caveat is that cash flow mismatches must be avoided. For
instance, excessive debt servicing costs during production ramp-up
periods when incoming cashflows for a utility business are low can
render even suitable projects unviable.
Therefore, debt usage
within the context of both the cashflow profile of the industry and
cashflow matching is an essential cog in the wheel to ensure economic
expansion. Measures such as effective bankruptcy regulations and prudent
lending that ensure better debt usage must be encouraged even further. The
linkage between hard infrastructure, soft infrastructure and optimal
debt usage is an essential one especially in the context of India's need
to expedite infrastructure creation, boost economic growth and create
jobs. A renewed focus on infrastructure building and the linkages is the
need of the hour.
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