Call for re-energising stalled infra projects

On January 22, at WEF, emphasising that India is taking steps to address problems in the infrastructure sector, Finance Minister Arun Jaitley said that multiple institutions are required to meet the funding requirements in this space. The infrastructure sector in India has been facing a lot of difficulties in the last few years.

In India, infrastructure output refers to a combined index that measures the performance of Eight Core Industries: Electricity generation leads the way with the weightage of 10.32 per cent, followed by steel production (6.68 per cent), refinery production (5.94 per cent), crude oil production (5.22 per cent), coal production (4.38 per cent), cement production (2.41 per cent), natural gas production (1.71 per cent), and fertiliser production (1.25 per cent).

Given its importance, the sector can conveniently be called the backbone of the economy. But the generated revenues from this sector have been quite worrying. Construction output in India averaged 5.08 per cent from 2005 until 2015, reaching an all-time high of 11.66 per cent in January 2010, and a record low of -0.42 per cent in April, 2015. 21 highway projects worth Rs 26,000 crore failed to attract bids over the last two years, according to the data from India Ratings and Research — a unit of Fitch Ratings.

Disputes too are hampering completion of projects. Data from the road ministry says that 112 cases worth Rs 25,000 crore were pending under arbitration, between the National Highways Authority of India (NHAI) and developers, till April-end, 2015. Added to all this is the fact that an underdeveloped bond market has forced Public Private Partnership (PPP) road projects to mainly depend on debt from commercial banks — Rs 1.67 lakh crore, till February 2015. The amount of debt is up 384 per cent from FY08. 

After finding it difficult to award highway sections to private developers, the government shifted from the BOT (build, operate, transfer) model to the government-funded EPC (engineering procurement construction) model, and introduced the new method — the hybrid annuity model — for projects granted from October 1, last year. Under the new model, NHAI will provide an initial grant of up to 40 per cent of the cost, and the developer must chip in with the rest and complete the project.

Land acquisition—an issue
These problems can be attributed to various reasons. Land acquisition and project clearance are the foremost reasons that could have played foul, in this regard. “Land acquisition has been a key area resulting in huge delay of projects, and it appears that it will continue to be an area of concern for some more time. Also, multiple clearances on projects including environment approvals, have resulted in delay beyond control,” says Saugata Maitra, National Director (Infrastructure), Jones Lang LaSalle.

Corporate debt  taken by infrastructure is also causing problems. The delay in Date of Commencement of Commercial Operations (DCCO) by more than two years has resulted in classifying the project as an NPA from the bank’s point of view. “Moreover, until sometime back the interest cost on loan was high. This affected the working capital loans and fresh loans for the project, resulting in huge corporate debt. The provision for restructuring of loans for infrastructure projects and also long-term project financing structures are essential to service infrastructure projects that generally have a high gestation period,” adds Maitra.

The construction industry is also under stress due to huge debt burden and lack of skilled manpower. “Fast-tracking of arbitration and dispute resolution mechanisms are required in order to ease the pressure on construction companies,” opines Maitra.

SPVs—one of the solutions
A lot of infrastructure projects have very high risk in the early stages, which are best managed by the public sector SPVs, while the private sector efficiency may be tapped in running government-owned brownfield projects or operation and maintenance of assets already created by the government, for eg., power generation and transmission utilities, bus terminals, airports, district hospitals and skill development centres. “This would increase the involvement of private players in infrastructure projects and encourage them to bring in investment for further expansion and modernisation,” adds Maitra.

“While we are encouraging the concept of ‘Make in India’, there has to be competitive bidding for large government contracts, including both public and private sector companies, and the nomination route needs to be avoided as much as possible,” says Maitra.

In the last Budget, the finance minister indicated the possibility of creating infrastructure financing specific funds, for instance, the ‘National Investment in Infrastructure Fund’, which will finance public sector infrastructure companies, thus have a high credit rating, and access the domestic and international debt markets including pension funds, insurance funds and other institutional investors. “Additionally, the Central and state governments are taking a number of positive steps to implement reforms and revamping policies and procedures to facilitate ease of doing business for the private sector,” adds Maitra. Re-energising of stalled projects is also the need of the hour. “It can be achieved  through re-negotiation of the concession agreement, fresh infusion of funds, inclusion of new players for specific modules of the project,” says Maitra.

This slump in the sector is worrisome, given the fact that we are already going through a phase of recession. It is not only adding to the stress in the assets of the banking sector, but it is also impacting the steel sector in India. The infra sector is the major consumer of steel products in India. Even investors are losing money in infra stocks, due to prevailing negative sentiments, at least in the short and medium term.

The stocks of infra major Jaypee Infra are trading in lower teens. It is important that before things go out of control, the sector gears up and strategises for its revival.
DH News Service