Macro picture of Indian infrastructure shows bright prospects

The Indian economy has grown remarkably well in the last few years, as the consistently sound performance of various segments led to robust performance.

This has brought infrastructure into sharp focus, as both the availability and quality of infrastructure have become crucial bottlenecks that must be dealt with to ensure a high growth rate.
The current economic slowdown is impacting different segments of industry and services in varying degrees. Since the demand for infrastructure is linked to the demand for goods and services produced by other sectors of the economy, there has been an impact on the prospects of infrastructure businesses as well.
However, the macro picture for opportunities continues to look robust when one sees the massive infrastructure deficit in power, roads, ports, airports and railways. Successive governments have enlarged the scope for both the public and private sector components of the infrastructure programme, though the focus has shifted to Public-private partnerships (PPPs). In sectors such as roads and ports, PPPs have become the default mode for building infrastructure.

The current economic environment will sort out the non-serious players in infrastructure space. Serious, long-term players with strong balance sheets and previous track record remain confident about the prospects. Bidding for projects is likely to be more sensible, as liquidity for weaker participants is expected to be tight.
The structural issues hindering the development of power markets need to be addressed urgently for unleashing the full force of private capacities. A number of procedural issues and regulatory challenges continue to hold back the sector, even as the gap between supply and demand continues to grow. Efficient and
timely allocation of fuel, assistance in providing approvals and permits (the critical ones being environment and forest), assistance in land acquisition and availability of evacuation infrastructure are necessary to get independent power producers (IPPs) off the ground.

It is also important that state governments use appropriate screening mechanisms before signing MoUs to ensure only serious players come forward.

Adequate supply of fuel will remain the key challenge for power projects. New capacity addition, coupled with higher plant load factors at existing facilities will lead to stress on coal companies to meet demand. Hopefully, the drop in international coal prices and charter rates will facilitate higher imports.

No serious infrastructure player can afford to ignore the roads sector, where the number of build-operate-transfer (BOT) projects is expected to be quite large. There have been a number of successful projects completed in recent times. The design-build-finance-operate (DBFO) format gives a lot of flexibility to the bidders, but in the short time granted, it is not possible to make use of this flexibility.

In recent times, the bidder response has been rather lukewarm, apparently on account of projects not being found viable. It is often said that over-specification has led to the current situation. The truth of the matter is that it is the government’s prerogative to specify the project configuration. All that is required is a fresh look at the viability gap funding (VGF) regime to make sure an appropriate budget is made available. It is interesting to see many state governments upgrading the state highway network through a flexible approach towards VGF.

In the port sector, while major ports have lagged behind, the minor ports have raced ahead. Most major ports have identified a number of PPP projects. Given their inherent advantages, PPP projects in major ports are far more attractive to investors than greenfield facilities. Unfortunately, this advantage hasn’t been exploited much. After the first few projects, the momentum has slowed down in major ports. Hopefully, we will see some catching up soon.

After the successful privatisation of Mumbai and Delhi airports, Investors were hoping to see Kolkata and Chennai being privatised. Opportunities in non-metro airports also failed to materialise. However, developers continue to pursue niche opportunities. Recently, Bengal Aerotropolis commenced development of an aerotropolis at Durgapur in West Bengal. Others are considering development of merchant airports.

Availability of long-term fixed-rate funding remains a challenge for infrastructure companies. Banks and specialised non-banking finance corporations (NBFCs) focused on project finance have asset-liability management constraints. Given the natural fit between the income profile of infrastructure assets and requirement of insurance and pension funds, large amount of long-term resources can be raised for infrastructure from these sources through a mix of government policy and suitable credit enhancement.

High withholding tax rates on foreign borrowings by infrastructure companies add to the borrowing cost. They need to be rationalised. The current taxation regime for capital gains on sale of unlisted equity shares also acts as a deterrent.

Infrastructure developers, like other companies, face several restrictions on buyback of shares. These restrictions hamper freeing of development capital even after the project cashflows have stabilised and a refinancing with higher leverage is possible. This reduces the total pool of development capital that would otherwise be available for developing new projects.

Provisions in bid documents restricting replacement of initial bidders with new investors also creates challenges in recycling of development capital. This should be made possible with adequate legal undertakings being provided by the new investors to adhere to the terms of the concession.

Relaxing the all-in-price ceiling for subordinated and mezzanine debt is also a long-standing issue for infrastructure companies. The ceiling has no reference to the underlying risk. If flexibility is granted, a large amount of quasi-equity capital can be attracted to infrastructure.

The writer is senior director, IDFC Projects. Views are personal.