IL&FS crisis looms on infrastructure space

It's been a year the infrastructure finance sector has been facing challenges with a few missteps hurting the real economy that is already witnessing a subdued level of economic activities - from building bridges to laying roads.

To make matter worse, the outbreak of the IL&FS fiasco earlier during the year made the whole foundation of the industry shaky.

Private investments in the infrastructure space have fallen to a decade low of around 25% in fiscal 2018 with the government spending picking up in the past few years.

The share of the private sector, which averaged 37% between 2008 and 2013, fell 600 basis points between fiscals 2013 and 2017 as a plethora of stalled projects and stressed assets dampened investor interest and risk appetite, said rating agency Crisil in a report.

While the highways sector saw revival due to interest from public-private partnerships (PPPs), the renewables sector also witnessed some buoyancy, although private investments in other infrastructure segments remained stagnant or weak.

"Resumption and broad-basing of private investments has become critical to sustaining the share of infrastructure investments at 6% of GDP over a medium-to-long term," said Ashu Suyash, managing director and CEO, Crisil.

"This requires new PPP frameworks, expeditious resolution of stressed assets, and steps to deepen financing sources," he said.

"The IL&FS crisis led to a consequential liquidity crisis, and banks have turned cautious on infrastructure lending. Many of hybrid annuity model (HAM) projects are awaiting financial closure. Developers are exploring alternative ways of raising equity for funding HAM projects," said Equirus Securities executive director Vijay Agarwal.

"While HAM projects have enabled the revival of private participation, there is some pressure on the financial closure front as lenders, especially public sector banks, are going slow on financing these projects on account of lack of appetite and lending freeze on many of these lenders, India Ratings said in a report.

For toll roads, the rater expects revenue to grow at around 9% on year this fiscal, supported by toll rate growth of about 4.2%.

"The agency believes there would be sufficient flexibility for mature roads to manoeuvre moderate downturns in traffic growth while speculative-grade assets' coverages hinge on double-digit traffic growth," it said.

Concerns over financial closure for newly-awarded HAM projects, however, have started receding as 80% of the awarded projects have been able to achieve financial sanctions from banks, while 20% are in the process to achieve financial closure, says Motilal Oswal in a research update on the sector.

But given that HAM projects witnessed difficulty in achieving financial for most of the year, the brokerage house expects award activity in this fiscal to be in favour of EPC projects.

Overall, for the infrastructure sector, Crisil has highlighted three steps to change the climate for private investments in infrastructure.

"Empower public counterparties so that they develop the necessary financial and institutional capacity. Simultaneously, build capacity to prepare a pipeline of bankable, shovel-ready projects worth $150 billion annually. Deploy a wider range of PPP models, including asset monetisation and investment-light structures that reflect sector-specific nuances, recalibrate risk-sharing, and redraw PPP contracts to broad-base them beyond the highway sector. Engender deeper financial markets for competitive long-term financing," the rating agency said.

For NBFCs focusing on infrastructure financing, IL&FS crisis has dried up the source of funds, particularly from banks while funds from other sources have turned costly.

"The scare of IL&FS crisis is still there and that is drying up funds. We have told the government that activities like infrastructure and project financing is a very critical and specialised area of lending and hence institutions and regulators should help the sector thrive and not overly restrict its growth," said Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance, a key player in financing equipment used in infrastructure projects.

For the sector, the crisis has now reached a point where the industry is now demanding handholding by the government which, players believe, should go beyond rescuing the fallen giant.

Some representatives of the industry, including Sunil Kanoria, vice chairman of Srei, L&T Finance's managing director Dinanath Dubhashi, Sriram Transport and Finance MD Umesh Revankar, Aditya Birla Capital CEO Ajay Srinivasan among others met prime minister Narendra Modi on Wednesday seeking his intervention.

"Regulatory framework has been amended with the objective of aligning it with that for banks. As a result, the focus has been more on the asset side of our balance sheet which as on date is subject to regulation which has been harmonised with that for banks. However, the liability side, that is fund-raising activity still remains highly restricted creating a funding crunch," the document given by the industry to the PM said outlining the key issues facing the sector.