When the Modi Government came to power in 2014, there was an almost audible sigh of relief from the building and infrastructure sector. This was followed by a host of positive moves: The establishment of the National Investment and Infrastructure Fund (NIIF) with an annual contribution of Rs 20,000 crore; increase of Rs 70,000 crore in investment in infrastructure in 2015-16 with a focus on railways and roads; a bankruptcy law to reduce non-performing assets (NPAs); the Housing for All by 2022 scheme and REITs. These are just some of the announcements made by the government in the Budget that led to an increase in expectations to revive the ailing infra segment. But the question remains: Has the healing process kicked off on ground?
Change of guard
¨We have seen a remarkable improvement in roads and power, sectors where projects were stuck because of issues related to land, clearances or tendering between the various states involved,¨ says Shubham Jain, Vice President, ICRA.
¨I think the thrust of the government is on digitising the entire approval process. The first step is to improve the accountability of various authorities, which I think is taking shape now. Around 18 states have already come on board and made all their approvals on the platform. Slowly, all states will be covered for better coordination and faster approval.¨ ¨I think there is renewed trust and interest in the infrastructure sector,¨ affirms Dr VP Joy, Joint Secretary, Project Monitoring Group (PMG). ¨Lots of ground has been covered involving issues and policy matters. Now, the Prime Minister has also started reviewing projects, so all the state governments are keenly involved.¨ In a similar move, the finance ministry last month called a high level meeting, which brought together lenders, corporates and bureaucrats from different ministries to chart out a plan to kickstart the stalled projects. Sensing the need to fast-track core sector projects, PMG was formed in June 2013 with a mandate to focus on projectswith investment of Rs 1,000 crore or more.
¨If you analyse the data on the problems and issues uploaded on the PMG portal, you will discover that the largest number of the problems relate to clearances with regard to environment and forest,¨ says Anil Swarup, Secretary, Ministry of Coal and former Head, PMG. ¨However, a lot of work seems to have been done to bring about transparency in the grant of clearances relating to environment and forest. You can now file such applications on the web and track their progress. This approach needs to be replicated for all clearances, including land acquisition. The PMG had identified a comprehensive list of clearances, including those at the state level. Such digitisation of processes and clearances as done for environment and forest will also enable the government to streamline processes and create a business-friendly environment.¨
Not everyone is convinced though. ¨They have been making the right noises but people are getting tired of that,¨ says S Ramnath, CFO, ITD Cementation India. ¨This government has not been talking about retrospectivity in taxation and things like that. In this Budget, they have introduced taxation, service tax on roads, ports and airports that were exempted. Now, some port projects have already been under execution before the Budget. What happens to that project cost? Has the government thought about that? At least, it should have said that this service tax will be applicable to new projects. The Finance Bill still has to be passed by Parliament and notified but I am saying this is the way the government functions. Now, if it were really concerned about retrospective and meant it, they should have made it very clear; we have no issue about service tax.¨ ¨In the Budget, there has been some tilt towards public-sector investment but the amount of funding required from the banking sector is simply not available andthe reforms needed on the other sub-sectors are not happening,¨ says RS Ramasubramaniam, Co-Chairman, Feedback Infra Pvt Ltd. ¨Having said that, I don´t want to sound very negative about the government. I think the energies in this system are remarkably different than the previous one. But for all this to actually transmit to projects on the ground, in my mind, is still a couple of years away.¨For his part, Sunil Srivastava, Managing Director, BARSYL, believes, ¨The overall outlook is not very bright. The sluggishness has not yet vanished or gone. There is a lot to be done on the ground. Several large projects have not yet been bid out, which would give confidence to players. Whether it is real estate, highways, railways or large dam projects, while there are many plans in these sectors, nothing has been announced yet. So, maybe 12 to 18 months down the line, the outlook would be better with more action on the ground.¨ And Suparna Chattopadhyay, Head -Capex, Centre of Monitoring Indian Economy (CMIE), observes, ¨For three quarters, new investments have increased and now it is up to the Government and promoters to push for implementation.¨ The majority of new investments are in the power and roads sectors.
While CW had done a similar story back in 2013 - the scenario was like this: According to the August 2012 report of the Ministry of Statistics and Programme Implementation, Infrastructure and Project Monitoring Division, out of 195 ´central sector infrastructure mega projects´ - costing Rs 1,000 crore and above - 84 were delayed with respect to the latest schedule and 30 projects reported additional delays in the range of one to 20 months. (These figures are with respect to projects relating to coal, power, road transport and highways, petroleum, shipping and ports, and steel sectors.)
That said, according to the 67th Flash Report on Central Sector Projects (Rs 1,000 crore and above) during December 2014, out of 251 projects, 127 were delayed with respect to original schedule and 24 projects have reported additional delay vis-á-vis the date of completion reported in the previous month. (see status on Delayed Projects on pg 50) The additional delay is in the range of one to 96 months with respect to projects relating to the atomic energy, coal, railways, power, steel, roads and petroleum sectors. The total original estimated cost of these 251 projects was Rs 788,629.01 crore and anticipated completion cost is likely to be Rs 970,972.78 crore, which reflects an overall cost overrun of Rs 1,82,343.77 crore (23.10 per cent of original cost). The expenditure incurred on these projects till December 2014 is Rs 411,545.86 crore, which is 42.40 per cent of the anticipated cost of the projects. In the railways sector, out of 83 projects, 21 projects have been delayed. As for the power sector, out of62 projects, 44 projects have been delayed. During the month, five projects reported additional delays in the range of two to 20 months. And, in the roads and highways sector, out of 37 projects, 23 projects have been delayed. During the month, 10 projects reported additional delays in the range of one to 12 months. It all begs the question: How is infrastructure truly faring? CW speaks to stakeholders across key sectors - airports, ports, railways, roads, real estate, metro, power - to get a performance overview for the past 10 months, evaluate the challenges and present possible solutions....
Close to 1,400 projects have been reported to be stalled due to issues related to different ministries on land acquisition, environmental clearance and others. The increasing number of stalled projects, resulting in bad loans, have adversely impacted banks' earnings. As far as environment clearance is concerned, online clearance worked well. From September-March 2015, 204 projects have received environment clearance compared to 127 clearances received in the same period in 2014. In case of land acquisition, the industry is eyeing the plug- ´&´-play concept positively. But what about funding?
According to Shubham Jain, Vice President, ICRA, ¨The plug-and-play concept will definitely improve the funding community because banks are skeptical of lending to infrastructure owing to the delays seen in the past.¨ Speaking about the construction sector on the whole, RS Ramasubramaniam, Co-Chairman, Feedback Infra Pvt Ltd, adds, ¨I would like to urge banking reforms and particularly re-capitalisation of banks. Banks have realised that now is the starting point for them to get some fresh energy rather than look at distressed assets. However, the government needs to step forward and ease issues related to banking.¨
On the government side, Suparna Chattopadhyay, Head-Capex, CMIE, points out, ¨The Finance Minister has looked into the issue of funding for infrastructure projects and banks have been asked to do the same, part of which is the 5/25 scheme. With the new rule, contractors should be able to renegotiate their loans.¨ Highlighting the benefits of the 5/25 rule is Yaduvendra Mathur, Chairman & Managing Director, Exim Bank. He says, ¨RBI has specified the 5/25 rule, wherein after 10 years, the tenure of the loan will extend and be shifted to another institution, or 25 per cent will have new banks come in.¨ This is to realise that tenure cannot be forced; for example, a housing loan cannot be paid back in five years and requires at least 25 years. But while banks provide housing loans for 25 years, they refuse to do the same for infrastructure projects. For his part, Mathur suggests, ¨A shift from recourse financing to non-recourse is required. Paying off an asset is necessary, like in the case of toll road projects. But currently, loans are given and interest collected irrespective of toll collection. The shift should be such that bankers are paid only through toll receipts.¨
Owing to stalled projects, banks have not been lending to good projects as well - some banks have a cap on sectoral lending and all have become risk-covered. Apart from this, even raising equity - because one can´t have 100-per-cent lending from loan - is a challenge for some infrastructure companies. S Ramnath, CFO, ITD Cementation India, suggests, ¨Infrastructure investments have to be government-led.¨ He cites the example of NHAI, which is increasingly looking at the EPC model because it is unable to attract investment from the PPP model. ¨Further,¨ he adds, ¨banks have a serious balance sheet problem today and are not in the position to lend. Also RBI has restricted borrowing from outside. So, we can´t borrow foreign currency for our working capital.¨
Considering all this, it appears the infrastructure sector is driven by a tight regulator. The time has probably come for the government to step up, address issues of funding, and take action in the right direction.