Infrastructure sector road to recovery seems distance away

“At the moment, investments in the infrastructure sector are viewed as risky,” emphasises Chintan Lakhani, Associate Director, Infrastructure & Project Finance, India Ratings & Research
 To revive infrastructure sector, the government has been adapting a series of revival policies. However, translating these initiatives into concrete, on-the-ground actions quickly will be the key to their efficacy. In an exclusive interview with ACE Update, Chintan Lakhani shares his views on benefits from these policy measures which would be.
Could you throw some light on the current scenario of the infrastructure and road sector?There have been numerous issues in the roads sector over the last couple of years. To mention some, we have inordinate delays in land acquisitions, distressed financial profiles of the sponsors, the approvals and clearances not coming in the right time because of lack of co-ordination among government agencies and the traffic underperformance which is the key problem for most of the operational projects. Just to give a perspective, some of the projects in our portfolio have witnessed traffic underperformance as high as about 35-40 per cent, a large part of which is to do with the over-estimation that was made during bidding. It has a lot to do with expectations that people would have. The macro-economic conditions that we are seeing right at present are certainly not helping matters, and one other aspect is funding constraints. The banks have reached their exposure limits and the lenders are looking at funding a long-term asset, at least a 30-year asset with loans which are around 10-15 years. So there is a clear asset-liability mismatch that needs to be corrected.
What are the measures undertaken to address these problems?The proposed road regulator, the premium re-scheduling, relaxation of exit clause for developers are some of the measures undertaken. In premium re-scheduling, we are looking at a situation where projects earlier attracted high premiums, but due to viability issues there are talks of withdrawals from these projects. So we are looking at a situation where premiums have to be rescheduled to actually try and make the projects viable because in the current state, these are ‘non-starters’. Hence we could look at a situation where existing projects are bid out as EPC cash contract or back ended rescheduling of the premiums or even a situation where re-bidding might actually require a grant from the concession grantor as oppose to the attractive premiums that were offered to win the projects in the first place.
One of the other positives is partial tolling during construction. We are looking at a situation where even if 75 per cent of construction is completed (in case of National Highway projects), the concessionaire is allowed to toll the project. One of its benefits is that it eases the liquidity pressure on the equity sponsors. It also doesn’t impair the debt-servicing capability since at least there are some revenues flowing in. That being said, from a debt servicing perspective, you do require the entire stretch to be tolled as well as can gauge the actual traffic numbers you have as opposed to the projections on the basis of which the project was awarded to the bidder.
What is your take on the proposed policy measures?Policy measures are reassuring and likely to revive dwindling investor sentiments. However, translating these initiatives into concrete, on-the-ground actions quickly will be the key to their efficacy. That being said, the sector has been too adversely affected to witness an immediate turnaround. Therefore, India Ratings is of the view that the accrual of benefits from these policy measures would be gradual and measured. The government’s continuing efforts to improve the funding situation in infrastructure and clear several infrastructure projects could provide a further fillip to the liquidity-starved highway sector. At the moment, investments in the infrastructure sector are viewed as risky. While implementing bodies and developers are looking at a course correction, the road to recovery seems some distance away.

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