Defining Infrastructure

A uniform definition of infrastructure has long been called for – it is therefore positive news that on 1st March 2012, the Cabinet Committee on Infrastructure issued a “Master List” of infrastructure sub-sectors. (Read more: Press Information Bureau, Government of India press release dated 1st March).

Up until now, there have been varying definitions across different regulatory bodies and other agencies, resulting in a lack of clarity over what constitutes infrastructure, and this has undoubtedly contributed to delays in the development of projects.

The move, initiated by the Prime Minister’s office in 2009, when the Ministry of Finance was asked to resolve this issue, aims to harmonise existing definitions and facilitate a coordinated approach amongst government departments and other agencies to support infrastructure development.

The list contains 5 broad categories: Transport, Energy, Water Sanitation, Communication and Social and Commercial Infrastructure. Within each of the 5 categories there are 29 sub sectors. The Master list is not “cast in stone” and according to the press release, has been intentionally designed to be flexible, with the possibility of including additional sub sectors, subject to approval by the Finance Minister.

The benefits of being classified as an infrastructure sub sector are numerous with favourable government policies offering tax and other concessions, meaning there is much riding on the classification.

Incentives on offer include long tax holidays for construction and operation and maintenance of assets such as roads, ports and power projects. Other benefits include the ability to sell bonds, where interest income earned is tax free, making them attractive investments. The National Highways Authority of India’s recent bond sale was a huge success and, in the March 2012 budget, further tax breaks were provided to the sector. Other favourable policies include viability gap funding from central government, for example, on non-viable road projects developed on a public private partnership basis, which would otherwise fail to attract private sector investment.

Recognising the urgent need to address the infrastructure deficit, the Government of India plans to double investment to £ 600 billion in the next 5 years and aims to attract 50% of this amount from the private sector. Given the scale, providing a conducive environment to aid investment is imperative and this is just the latest measure. The government has approved the establishment of Infrastrucuture Debt Funds specifically to attract long term of long-term debt and, to make them attractive to investors, withholding tax has been reduced from 20% to 5%.

Harmonisation of definitions will not mean that infrastructure will become a priority sector for bank lending purposes. Here, agriculture remains the priority and this is unlikely to change. The Reserve Bank of India Committee, formed to re examine the existing classifications and suggest revised guidelines for priority sector lending, published its report on 21st February. The report firmly sets agriculture, micro and small enterprises, and low income groups and other sectors and sections of the community that would otherwise not have access to credit,  firmly at the centre of bank priority sector lending (read more and access the report).