Delays in project execution have led both the promoters as well as banks to lose money on account of cost and time overruns.
Siva Subramanian, Director, India Ratings & Research emphasises that the government must have a focus-based approach to resolve pending issues.
Do you see the pace of infrastructure development sustaining at the present levels? Nation building requires a long and concerted effort. India being a developing country, the central governments have consistently deployed 1.8 per cent of GDP on an average towards infrastructure in the last ten years. The government has focussed on speeding up project awards and land acquisition for the last three years. That said, a public spending impetus to infrastructure is long overdue. A sharp rise in spending may, however, not be feasible, given the limited fiscal leeway available; therefore, we can foresee a gradual uptick. Policies to retain and further galvanise private participation would be critical.
With Rs 50 trillion investment requirement, has the country been able to effectively hardsell the potential of the Indian infra growth?
Learnings from a decade of PPP experience are invaluable. The government has constantly improvised and tweaked various models to elicit private participation. In any infra sub-sector - road, power, or airport - the policy shift from toll to HAM and feed-in-tariffs to reverse auction has paved way for investments. Over the last two year, there have been strong inflows of foreign money being invested in roads, renewables, and airports indicating high attractiveness of Indian infra to overseas investors. The constant endeavour by the government to revive bond market is also appreciable, though there are uncontrollable factors like global meltdown. Setting up of institutions like IIFCL and launching of framework for new classes of institutions like IDF and InvIT has changed the tectonic plates of the market.
Multilaterals involvement in urban development projects is also noteworthy. The first bond in the municipal sector was mobilised with a bond security fund enhancement from a multilateral and the state government of Tamil Nadu way back in 2002 and paid off fully in 2017. This transaction was rated by India Ratings at IND AA(SO). The multilaterals have extended loans and remained key contributors to urban development like in metro rail projects.
Generally, the market would see cycles, therefore, rather than looking at this at a point in time, it should be seen from the prism of continuing journey.
Do you find the valuation of the ongoing and proposed infrastructure projects attractive for investors?
Valuation of projects is driven by the project fundamentals. CY18 saw sparse action in M&A segment due to bulk deals in previous years and some assets were repackaged and moved to InvITs. The remunerative tariff-based renewable assets and transmission projects with reasonable operational track record and road assets with strong revenue growth rates would remain as cynosure.
Which initiatives do you perceive as driving the sector's growth in 2019-20 fiscal?
The country harvested the benefits of the initiative to push road contracts on EPC and HAM model in the form of improved construction progress (FY14: 9 km/per day; FY19 (E): 30.8 km/per day). This was a success as the focus has been towards reviving languishing project and addressing land acquisition process. With continued focus on HAM/EPC and the pace of the construction remaining moderate, the growth would get a boost.
Airport privatisation resulted in Delhi, Mumbai, Hyderabad, and Bangalore rank among the best worldwide. Similar plans for six more airports, combined with regional connectivity scheme and refurbishing plans of airports, would boost infrastructure penetration. Also, the aspiration of the middle class to fly with the increased propensity to fly due to affordable fares, the economic growth would have a salutary effect. The plan to build 175 GW of renewable capacity and steadfast award of contracts, albeit some cancellations, would provide tailwinds for the growth. Namami Gange projects are seeing a slow start and if the government decides to fast track the award, this space would gain traction.
Do you see any new trends emerging in the area in the year ahead?
Bank lending has been the principal funding mode for the projects. With prompt corrective action on PSU banks and reluctance to fund HAM, higher load of new projects funding has been borne by private banks and NBFCs. With gradual acclimatisation of the model, there could be increased participation from state-owned banks.
Strongly performing road assets tapped capital markets instruments with limited success; however, developers with high operating capacity floated InvITs and hived it off with reduced debt. With HAM projects expected to be completed over the next couple of years, a lot many projects would be available to tap capital markets. Also, transmission asset on completion would issue capital market instruments or transfer to InVIT. Renewable players with sizeable portfolio of projects pool raise funds either as bank loan or as a capital market instrument. This trend will gather momentum in 2019. Large players like Renew, Adani, Greenko, Mytrah, and Acme are best suited for this. Also, partial credit enhancement from IIFCL and IREDA for a single counterparty-based project or for pool would also see some action in CY19.
Is there any possibility of a revival in PPP projects?
Private-owned renewable projects are a roaring success despite some irritants in the form of tepid responses to some bids. The revival of the existing thermal projects is contingent on the timely conclusion of the resolution process. The resolution process is protracted than the expectations of the industry.
Has the country also been able to curtail cost and time overruns?
Yes, the fulcrum of HAM is to address delays in projects. Renewable projects are generally on time, there are delays in commissioning due to land acquisition issues and transmission infrastructure. However, the authority in many cases has recognised these on the basis of the merits of the cases and allowed the affirmation of PPA tariffs. Cost overruns are minimal in transmission and renewable projects.
According to the Economic Survey 2018, the country would require $4.5 trillion over the next 25 years for infrastructure development. Your comments...
Given the fund requirement, government funding will be inadequate and the asset liability mismatches in banking system would limit increased high exposures. The government aims to induce the capital market by suggesting the corporates with over Rs 1 billion debt to raise 25 per cent from bonds. This move would bear results in a long term. The banks are ideally suited to bear construction risks. However, based on the attractiveness to the project, the operation risks could be transferred to the bond market. The bond market is equipped for taking long-term exposure required for long gestation infrastructure projects.
'The country harvested the benefits of the initiative to push road contracts on EPC and HAM model.'