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Construction : Cover Story | November 2016 | Source : Infrastructure Today

There is a need for the regulator to get more teeth

Sandeep Upadhyay - MD & CEO, Centrum Infrastructure Advisory Ltd, says that a more consultative process involving the NHAI and all stakeholders, by giving due weightage to the lenders, would result in a win-win situation for infrastructure development in India.

Why are infrastructure projects turning unviable economically?
Infrastructure projects are grappling with viability due to the host of challenges faced right from the time they are conceptualised. In the past, some of the large road projects awarded by the Authority had base cost which were grossly underestimated, thereby significantly influencing the bidding parameter assumptions.

The industry feels that some of the clauses in the Concession Agreement based on Authority Cost estimate may be skewed in a way that it adversely impacts the developers in the BOT model.

While it may be inadvertent, but for some projects, the cost estimates were off the mark. This was evident in the Gurgaon-Jaipur and Panvel-Indapur road corridor projects which have been also struggling with inordinate delay. There was a huge difference in the original cost estimate at the time of conceptualising and the actual implementation cost with the bloating interest cost during construction (IDC) further being regressive to the financial viability. The other implication of the Authority´s underestimation of project cost is the limitation of Viability Gap Funding (VGF) which is normally capped at 40 per cent of the overall cost estimate.

In a similar manner, the termination clause as the previous Model Concession Agreement (MCA) was essentially based on the Authority cost estimate and at times during the event of default or termination, would be grossly inadequate to compensate the lenders who would have taken exposure in the project based on higher estimates vis-a-vis the Authority´s Project Cost estimate.

The Kelkar Committee observations were clear that under the PPP scheme there needs to be an equitable risk-sharing mechanism framework which as of now seems to be tilted in favour of the government, and needs to be iterated to revive the private sector interest back into the PPP model. In the context of the current subdued investment environment, the Committee has emphasised the need for the government to predominantly take major financing risks which in the recent past have been pushed primarily on to the private sector under the disguise of encouraging a competitive landscape for PPP projects. Given the slowdown in bidding for projects between 2012-2015, it may not be an overstatement to say that the strategy had backfired; however, it seems the interest is gradually reviving at the backdrop of models like HAM being rolled out in the last year or so.

What is the way forward?
The recent initiative to allow release of funds against arbitration awards, backed by bank guarantees from the developers, will help release a huge corpus of funds which earlier used to be stuck due to administrative and legal approvals. The Kelkar Committee has reiterated the same and this is likely to free up a lot of funds required to meet the working capital requirement by the EPC/BOT players. Through the HAM model of financing, the government is now absorbing some components of the risks, thus far borne solely by the private sector.

The State is keen that going forward the financial needs are pragmatically assessed by encouraging robust project appraisal with growing involvement from specialized financial institutions like IIFCL, PFC, IREDA etc.¨

¨In the recent years the banking sector experienced unprecedented stress levels due to high level of NPAs leading to reduced credit availability from the domestic banks. The Gross NPA with the SCBs currently stands at an alarming 7.6% and is expected to worsen to about 8.5-9.3% by March 2017 leading to further stress on the Capital Reserve Adequacy Ratios of the banks. This highlights the need to diversify the sources of funding for infrastructure financing. Considering the fact that the NPA position revolving around infrastructure projects is grim particularly on the side of Public Sector Banks (PSB) there is serious merit in encouraging debt financing through financial institutions like IIFCL, REC, PFC and IREDA etc. and further leveraging the presence of Infrastructure Debt Fund (IDF) to complement the PSBs to fund Infrastructure projects. On the Equity side the NIIF initiative along with conduits like InvITs etc. could boost the equity financing in a significant way¨ ¨The NIIF with a corpus of approximately Rs. 40,000 Crores is expected to be operational soon and start its funding activity, NIIF is as an investment vehicle for funding commercially viable greenfield, brownfield and stalled projects. NIIF will play a pivotal role, especially in infrastructure financing of projects in areas of green energy and highways in particular. This is an evolving model and has the potential to boost investment in the sector.¨

MORE TEETH TO REGULATORS FOR DEALING WITH NPAs
´There is an imperative need for the regulator to get more teeth to deal with the stressed asset case. The PSBs have repeatedly pointed out that there is not enough authority given to banks to take bold decisions as far as dealing with stressed accounts. Another major impact that will be seen over the next 12 to 18 months is the implications of the Bankruptcy and Insolvency Code, 2016.

Also, there is interest evincing from the long term investors including the likes of foreign Pension and Sovereign funds for the Toll Operate Transfer model currently being contemplated by NHAI. These projects should be hitting the market for monetization in the next 3-4 months or so¨

¨Current initiatives to Make Infrastructure for India are being scaled up by the Union government. This has changed the game quite positively. With financial risks essentially involved in green field infrastructure projects slated to absorbed by the Union government based on well thought through models like HAM etc. Infrastructure developers and EPC contractors will be better placed to garner higher margins (12 to 14 per cent EBITDA margins) as against the subdued 6 to 8 per cent margins that exists today.¨

¨Similarly, there has been a standardization of the Concession agreement after the NHAI introduced the Model Act of 2008. Hence documentation is now standardized and balanced on aspects of land acquisitions and termination clauses. Hundred per cent FDI is now allowed, although the really big challenge will be attracting finance for green field projects.¨

 
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