COVID 19 And Economic Package: A Future Enabler Or An Immediate Relief?

Manoj K Singh

17 May 2020 12:41 PM GMT

  • COVID 19 And Economic Package: A Future Enabler Or An Immediate Relief?

    The announcements made on 16.05.2020, being the 4th tranche of the special economic package, will surely provide yet another feather in the cap that our Hon'ble Finance Minister, Nirmala Sitharaman, has on. The schemes and opportunities laid down in this announcement will surely go down in history. It changes our way of looking at, and approaching, the infrastructure industry. For the sake of relevance, I will be sticking to the policies provided for mining, aviation, power and viability funding.

    First and foremost, the introduction of commercial mining in the coal sector is a blessing. The shift from fixed rupee/tonne to a revenue-sharing mechanism is quite a spectacular move. This revenue model, coupled with an open market exchange of coal blocks, will definitely make this industry much more profitable and self-reliant. With the 50 new coal blocks and the go-ahead for private sector participation in exploration, the industry is going to be flooding with opportunities.

    The investment of Rs. 50,000 Crore, for evacuation equipment, conveyer belts, etc., will not only provide for a better yield, but will also help reduce the environmental impact of coal. The concession in commercial terms, and other such benefits worth Rs. 5,000 Crore, provided to CIL's customers will boost the profitability of all the allied infrastructure sectors. The coal bed methane extraction rights are going to provide a whole new segment for the mining sector. It is too early to tell how the ease of doing business measures, such as the mining plan simplification, etc., will pan out, however, the 40% increase in annual production will definitely be quite a boost.

    The reforms provided for the mineral sector are the exploration-cum-mining-cum-production regime, auctions of 500 mining blocks, removing the distinction between captive and non-captive mines, development of a mineral index and rationalization of stamp duty payable. These reforms are sure to boost production, increase profitability and give a huge upward push to the economy.

    The increase in usage of airspace is an unparalleled policy change. However, in purely monetary terms, it can either benefit the airlines, or the customers. There will definitely be a reduction in fuel use as the total distance to be covered would be reduced, but will the airlines pass this benefit to the end consumers? If they do indeed pass this on to the consumers, then they would not benefit from it, on purely monetary terms. On the brighter side, shorter flights mean more flights, hence more earnings. However, it is yet to be seen how and when this industry is able to take off again.

    The privatization of distribution of power in Union Territories is a much-needed move. Electricity has been a cause for concern in the UTs and the discoms have always lagged behind. This move will definitely lead to better service to consumers and a more efficient and financially stable power distribution regime.

    Finally coming to the Viability Gap Funding. The increase of funding limit from 20% to 30% for Social Infrastructure Projects will open many more roads to development. As we all know, viability funding is provided for those projects which private parties do not wish to undertake on their own, at full cost, as they do not provide for a viable NPV. The outlay for this would be 8,100 crores, for all sectors. Viability funding is provided at the beginning of the project for those projects which fall under certain categories. If the existing Viability Gap Funding Scheme is to be used, without any amendments, it would not provide any benefit for those projects which have become unviable due to COVID-19.

    All the new schemes and change in policies mentioned above provide a phenomenal base for growth and development, of not just the Infrastructure industry, but the nation as a whole. However, if I am not mistaken, these benefits are neither applicable to COVID-19 hit projects, nor do they provide any 'relief' to the blow caused due to COVID-19 or the resultant lockdowns. As national policies for growth and development are concerned, these policies might be the most prominent ones in the recent past. However, as a 'relief' to the downfall being experienced by the industry and the economy due to the COVID-19, they are nowhere near satisfactory.

    How are private parties to bid for new blocks of coal or minerals when their money is already stuck in the existing projects which have been hit badly due to COVID-19? How will a probable increase in production benefit those companies whose existing projects might bankrupt them, owing to no fault of their own? How is an increase in airspace and the possibility of saving of costs going to help the aviation industry when it is not even clear whether there will be such an industry left by the end of this pandemic? What tickles my intellectual fancy the most is how is an increase in viability funding for FUTURE projects is going to save the ONGOING projects that have lost their viability due to COVID-19?

    The FM clarified in their notifications released on 13.05.2020 that there will only be an extension of time for the contractors. There is still no guarantee or clarity on whether by 'no cost to contractors' they actually meant no cost to contractors! The government agencies are still not clear on the release of bank guarantee for completion of work. Contactors are still waiting to hear a positive word on the same. Some contractors are being asked to wait for the same, even though they have completed 100% of the work.

    I am of the view that before such an elaborate, extraordinary and elegantly beautiful plan is drawn to lift the economy to heights unseen, it is important to revive the economy from the fall it has taken due to COVID-19. A car with no fuel will not start no matter how smooth its tires or efficient its engine is. The industries need fuel, i.e. influx of capital investments from the government, for their existing projects. The first step would be providing cost to contractors along with the extension of time and then plan out a COVID-19 unviability funding scheme to help those projects which have lost their viability due to this pandemic. This 'relief' is not the end of our troubles, it is not even the beginning.

    Mr Manoj K Singh is the Founding Partner at Singh & Associates. The author's views are personal.

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