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Construction : Cover Story | March 2018 | Source : Infrastructure Today

The Big Infra Opportunity

Stakeholders harp on the government's infrastructure push and expect construction orders of Rs.18 trillion in the next six years. This order inflow volume should support 12 to 15 per cent of industry-level execution of compound annual growth rate (CAGR).

Infrastructure sector, the most visible and inevitable opportunity, holding execution potential, political stability and reasonable inflation expectations, has seen good support in stocks. The sector is estimated to have risen to Rs 37 lakh crore, or 5.6 per cent of gross domestic product (GDP), between fiscals 2013 and 2017, marking a 56 per cent growth over the Rs 24 lakh crore spent in the preceding five years.   
In fiscals 2016 and 2017, higher central government spending partially offset a steep decline in private investments and deterioration in state government finances. Five sectors û power, roads, telecom, irrigation and railways - accounted for approximately 83 per cent of all such investments in the past decade.

The government has consistently increased public expenditure on infrastructure in order to boost employment and provide renewed impetus to economic growth. The Government of India's (GoI's) total expenditure this year has crossed Rs 11.47 lakh crore (up to September 2017), out of the budgeted expenditure of Rs 21.46 lakh crore, showing an increase of Rs 1.2 lakh crore over last year.

The special thrust of this drive is on key development sectors, including rural roads, housing, railways, power, highways, ports, airports and digital infrastructure. The capex target of the GoI for 2017û18 is Rs 3.09 lakh crore, which is 31.28 per cent higher than last year, out of which Rs 1.46 lakh crore has been spent on capital works till September 2017. In addition, the government has fixed a capital expenditure target for central public sector enterprises (CPSEs) for 2017û18 at Rs 3.85 lakh crore, out which capex spending of Rs 1.37 lakh crore has been achieved till September 2017.
Vivek Sharma, Senior Director and Anand Madhavan Director, Infrastructure & Public Finance, CRISIL Infrastructure Advisory see the power, transport and urban sectors accounting for 78 per cent of the overall infrastructure spending. Outlays of such magnitude require expeditious resolution of the problem of stressed assets in banking, front-ending the creation of bankable projects, comprehensive restructuring of publicûprivate partnership (PPP) frameworks and deepening of the infrastructure financing ecosystem, which is of tremendous importance.

Stakeholders harp on the government's infrastructure push and expect construction orders of Rs 18 trillion in the next five or six years. This order inflow volume should support 12 to 15 per cent of industry-level execution of compounded annual growth rate (CAGR). Analysts expect ~Rs 7 trillion orders from Bharatmala and Rs 2 trillion orders from state governments and public works departments (PWDs) on roads and bridges. The urban transport and railways segment should be a Rs 3-trillion opportunity, given the thrust on metros for all towns with a population greater than 1 million.

With initiatives like 'Housing for All' and 'Smart Cities,' buildings and factories would easily emerge as a Rs 3-trillion opportunity. Airports, irrigation, water and escalations across the board would be another Rs 3-trillion opportunity. According to the NHAI website, IT expects 35 hybrid annuity model (HAM) and 34 engineering procurement construction (EPC) projects spanning 1,581 km and 994 km, worth Rs 360 billion and Rs 260 billion, to be bid out in the next six months.

Sectors to watch


Take the example of railways (turn to page no 81 to refer Railways: Looking at Major Infrastructure Enhancement).

A target of Rs 131,000 crore has been made for capex for the railways. Against this, an expenditure of Rs 50,762 crore has already been achieved. The main thrust is on upgrading the infrastructure to improve safety, laying of new lines and providing passenger amenities (turn to page no 84 to refer PPPs Get Rolling in Railways). LIC has provided Rs 1.5 trillion to railways and expects them to push programmes like electrification, track laying and station redevelopment, all in a significant manner.

Railway electrification of Rs 350 billion across 30,000 km is expected to be completed in the next four or five years. Railway electrification can save Rs 120 billion of fossil fuels. Currently, package sizes are smaller at 30û35 km, but are expected to increase to 300-500 km going ahead. IRCON, L&T, KEC, Kalpataru Transmission and Tata Projects, that takes the work and subcontracts it, are some of the major subcontractors in this space.

The following are the key among the capital works completed:
  • New lines (Construction) (Rs 4,531.93 crore)
  • Gauge conversion (Rs 1,842.24 crore)
  • EBR partnerships (Rs 11,504.29 crore)
  • Track doubling (Rs 4,069.60 crore)
  • Traffic facilities (Rs 517.05 crore)
  • Rolling stock (Rs 8,214.11 crore)
  • Leased assetsûprincipal component (Rs 7,781.97 crore)
  • Road over/under bridges (Rs 1,068.09 crore)
  • Track renewals (Rs 2,837.72 crore)
  • Electrification projects (Rs 1,119.17 crore)
  • Passenger amenities (Rs 539.73 crore)
  • Investment in JVs/SPVs (Rs 1,263.52 crore)
  • Metropolitan transport projects (Rs 446.16 crore)

Mangal Dev, Head of Hitachi Rail Systems Co, India & South Asia Region, believes that the Indian Railways is taking a lot of action in the right direction. Firstly, it is now using right technologies and has also made changes to its project implementation strategy. It strives to track all the ongoing projects and complete them expeditiously before starting on something new. This is very important as it means that resources will get freed up faster for other projects. Secondly, the pattern of these contracts is also changing. The Railways has realised that it has to design and build projects from The Dedicated Freight Corridor (DFC), which in turn, is showing the Indian Railways how this contracting can be carried out for large Engineering, Procurement and Construction (EPC) projects. This would mean a lot of well-crafted contracts for both the Railways and industry. Thirdly, on the funding part, the Railways is quite ambitious about modernising its network and making it safe. It has managed to get funds from several multi-lateral organisations like JICA, World Bank and ADB, as well as from new sources such as the Life Insurance Corporation (LIC). A new development fund is also being created in addition to the Indian Railway Finance Corporation (IRFC).

Meanwhile, for Subrat Nath, Area Director, Asia-Pacific, Talgo there are two kinds of projects that they are interested in. The first is the high-speed train project. But as far as I know, says Nath, 'presently only the Mumbai-Ahmedabad project is on. There is already an memorandum of understanding (MoU) signed with the Japanese for the purpose. But we will be very happy if there is an open tender at least for the rolling stock as we are here with a very good product. We have won the tender for a high-speed train in Saudi Arabia after a highly competitive bidding process.ö
That said, Prabhakar Atla, Senior Vice President, Rail Transportation Business Unit, Cyient is of the opinion that despite the railway ministry have a daunting task to complete, it is achievable. He draws a parallel here from India's progress and achievements in renewable energy generation, where the target of generating 40 per cent of energy from renewable sources by 2030 seemed daunting in 2015. But we are now predicting to generate 57 per cent of energy from renewable sources by 2027.

In the power sector, under Pradhan Mantri Sahaj Bijli Har Ghar Yojana scheme, efforts are made to provide last mile connectivity and electricity connections by March 2019 to all remaining households that lack them in the country (turn to page no 56 to refer Energy Transition and page no 59 to refer Matching the Grid Parity). This is in addition to the ongoing scheme for rural electrification, the Deen Dayal Upadhay Gram Jyoti Yojana. The proposed outlay is Rs 16,320 crore, involving GoI support of Rs 12,319.50 crore. 

To complete phases I and II of Pradhan Mantri Gram Sadak Yojana (PMGSY) for rural roads, the GoI, along with the states, proposes to spend Rs 88,185 crore over three years starting 2017û18. This will result in the construction of 109,302 km of rural roads covering 36,434 habitations.

In addition, projects worth Rs 11,725 crore, involving upgradation of 5,411 km of existing roads and construction of new roads in 44 left wing extremism (LWE)-affected districts, will be completed by 2019-20.

That said, a roof for everyone is also planned by the government. Under the Housing for All 2022 scheme, about 2.2 crore families are to get their homes, thus giving a big boost to the construction sector. Under the Pradhan Mantri Awas Yojana (Urban), or PMAY (U), 1.2 crore units will be built with an outlay of Rs 1.85 lakh crore over the next three years. Under PMAY (Gramin), 1.02 crore units will be built with an outlay of Rs 1.26 lakh crore by the centre and states by March 2019, of which 51 lakh units will be built in 2018 (turn to page no 105 to refer PMAY-U: A Boost For Urban Housing).

Taking forward its commitment to providing more efficient transportation, the government has removed bottlenecks from the roads sector and significantly stepped up the highway development and road building programmes. To further optimise the efficiency of movement of goods and people across the country, the government has launched a new umbrella programme called Bharatmala and Sagarmala. This roads building programme involves a capex of Rs 6.92 lakh crore over the next five years for 83,677 km of roads (turn to page no 87 to refer Ambitious Target and page no 91 to refer Roads on a Hot Streak).

The Sagarmala programme has undertaken 150 projects for modernising existing ports including construction of new berths, and has identified 130 projects in rail and road sectors for last mile connectivity. This requires an investment of $100 billion by 2025, of which about $40 billion has already been spent. Around 111 inland waterways fit for river navigation have been identified, of which 32 will be developed in the first phase at an estimated investment of $800 million. These projects provide major investment opportunities for the international community (turn to page no 73 to refer Port of Call). Here, IT spoke to four major ports-Visakhapatnam, Mumbai, Kolkata and Haldia to understand their investment plans under Sagarmala.

According to MT Krishna Babu, Chairman, Port of Visakhapatnam, the port is investing nearly Rs 7,000 crore for its various envisaged plans under Sagarmala programme that includes deepening of channels and berths, development of new berths, modernisation and mechanisation of existing berths and improvements in connectivity and other logistics such as multi-model logistic parks.

Meanwhile, Mumbai Port Trust is investing around Rs 4,764 crore in projects ranging from cruise tourism, light house tourism, fish harbour to port connectivity and capacity augmentation. Sanjay Bhatia, Chairman, Mumbai Port Trust emphasised more on cruise tourism as the envisaged plans will enable Mumbai to be the home port for 'Costaneo Classica'the first home port operation in India.

That apart, to improve rail-road connectivity, which would lead to improved aggregation  and evacuation of cargo to and from the dock system, the Kolkata Port Trust is taking several measures. According to S Balaji Arunkumar, Deputy Chairman, the port is investing Rs 285 crore in projects including rail over bridge, 2nd rail line from Durgachak to HDC railway system, upgradation of various tracks at EJC yard at KDS, modernisation and upgradation of existing railway network and improvement of road connectivity to facilitate the trade and port users. 

Lastly, G Senthilvel, Deputy Chairman, Haldia Dock  divulged its Rs 6,900 crore plan under Sagarmala. The dock is planning Rs 5,900 crore port-linked industrialisation and coastal community development, in addition of Rs 624 crore planned for stimulating the economy and creating employment within the sector.

Meanwhile, Metro Rail is expected to provide a big fillip for construction companies over the next three to five years due to a strong pipeline of projects in their approval or planning stage. These projects are likely to come up for bidding within the next five years. This is expected to boost the order book of construction companies from Rs 75,000 to 90,000 crore over the next three to five years (turn to page no 101 to refer Sizeable Opportunities).

Many contracts are yet to be awarded in the ongoing approved metro rail projects. Apart from the operational and under-implementation projects, 15 cities have proposals for development of metro, which have potential of over 1,400 km of network. Also, India's large urban population leaves tremendous scope for metro network expansion. According to ICRA, of 18 cities with over 2 million population, nine cities have operational metro network, while five have projects under implementation or proposals for development. Further, many cities with operational metro network have sizeable expansion plans. In total, about 440 km of new metro network development has been approved and approximately 800 km is in the proposal stage.  

Projects derail
According to the Ministry of Statistics and Programme Implementation, as many as 350 infrastructure projects, each worth Rs 150 crore or above, is believed to see a cost overrun of Rs 1.95 lakh crore due to various reasons, including delays.

The Ministry's September 2017 flash report suggests that the total original cost of implementation of the 1,263 projects is Rs 15 lakh crore and their anticipated completion cost is likely to be Rs 17 lakh crore, which reflects overall cost overruns of Rs 1.95 lakh crore or an increase of 12.60 per cent of the original cost. According to the report, the expenditure incurred on these projects till September 2017 is Rs 6.79 lakh crore, which is 38.86 per cent of the anticipated cost of the projects. The 1,263 projects in question include 350 that reported cost overrun and 297 with time escalation.

The report states that of these 1,263 projects, 14 are ahead of schedule, 307 are on schedule, 297 are delayed, 350 show cost overrun and 103 show both time and cost overrun with respect to original implementation schedules. However, the report states that the number of delayed projects comes down to 249, if delay is calculated with reference to the latest revised schedules of completion. The report also highlights that the original/anticipated commissioning dates are not reported by the authorities concerned for 645 projects. Of the 1,263 projects, 380 are mega projects worth Rs 1,000 crore and above.

Total original cost of implementation of these 380 projects is Rs 11.96 lakh crore. Their anticipated completion cost is likely to be Rs 13.62 lakh crore, reflecting overall cost overruns of Rs 1.66 lakh crore or an increase of 13.93 per cent of original cost. The expenditure incurred on these projects till September 2017 is Rs 5.64 lakh crore, which is 41.45 per cent of the anticipated cost of the projects.

Out of the 380 mega projects, 145 projects have cost overruns with respect to the original cost and the number of such projects decreases to 114 when cost overrun is calculated on the basis of revised cost.The report attributes time overrun to a host of issues including delay in land acquisition, forest clearance, supply of equipment, fund constraints, the Maoist incursion, legal cases and law and order situation.
Hari Sankaran, Vice Chairman and MD, IL&FS, points at some obvious loopholes.

According to him, from 2010 to 2017, the total number of long-term key players that were bid out by state electricity boards is under 20,000 MW. 'There are 75,000 MW of thermal assets ready to supply power, but there is no long-term power purchase agreement in placeö, he cites as an example. He observes that unless the government backs sectoral reforms with revenue generation schemes, private players are not going to be able to make any headway whatsoever.

Funding Options
Vinayak Chatterjee, Chairman, Feedback Infrastructure
first cleared the air about the government's intentions by saying, 'There is no funding constraint for a proper pre-handled brownfield or greenfield project. The real issue is institutional capacity to move things at a pace.'

He then revealed the Pandora's box to IT readers. The first one is budgetary provision and the second one is that the government has off-budget domestic institutions like provident funds, NBFCs, banks, external commercial borrowings (ECBs), mutual funds,  insurance funds, capital/corporate bond markets, etc, which can be leveraged to their fullest. Due to the long-term funding requirement of infrastructure sector, it is best suited to be financed by institutional investors with matching long-term liabilities as well as risk appetite.

However, infrastructure credit in India is largely from banks and NBFCs, accounting for over Rs 16 trillion of credit.

Among NBFCs, infrastructure finance companies (IFCs) also play a major role in providing credit to infrastructure entities. They are dedicated to lending majorly to the infrastructure sector with a stipulated minimum of 75 per cent of total assets to be deployed in infrastructure loans. According to Chatterjee, the other sources of debt funding are corporate bond markets, infrastructure debt funds (IDF), etc. Apart from these sources, funding of some infrastructure projects is also from multilateral agencies like World Bank (WB), International Finance Corporation (IFC), Asian Development Bank (ADB), Japan International Cooperation Agency (JICA), etc. Road cess, coal cess and cess on petroleum products are also collected to invest in large infrastructure projects. What is more, since the government is the owner of high-valued public sector enterprises and large stretches of land, the options are all open. Add to the bucket, long-term institutional funders from abroad such as Brookfield, the Canadian Pension Fund as well as National Investment and Infrastructure Fund (NIIF).

Meanwhile, public sector banks have been the major sources of infrastructure project financing in India, accounting for over half of the credit to the sector by banks and IFCs. The credit to infrastructure sector from banks has increased sharply from Rs 72 billion as of FY2000 to Rs 9.3 trillion as of FY2015. However, the outstanding bank credit to infrastructure has slowed down and declined in the last two years due to increasing non-performance assets (NPAs) and sector-specific constraints.

At the outset, Karunakaran Ramchand, Managing Director, IL&FS Transportation Network Ltd believes that publicûprivate partnerships (PPPs) present the most suitable option for bridging the infrastructure gap. He said, 'Developers and investors are focusing on IDFs and InvITs now. We should also explore measures like 'land value capture mechanisms,' since it is natural that development of transport infrastructure will add value to land and real estate.'

Until recently, says Sanjeev Kaushik, Deputy Managing Director, India Infrastructure Finance Company, 'we used to talk about the cost of funds being too high and, as you are aware, some infrastructure projects have a long gestation period. There is a period of construction and then there are cost overruns and delays. Therefore, it is important for a project to be able to service the loan over a long period of time.'

Now the situation is gradually changing. Of late, the cost of funding has come down substantially. But despite that there are still cost overruns because of the various delays that we have seen in the past. The government is trying to resolve this situation. Steps are being taken on environment, land acquisition and in terms of speeding up arbitration proceedings. Next, there is a shortage of funding agencies presently, because traditional lenders such as the public sector banks face capital constraints. They have sector saturation in terms of exposure, and since they have their own capital problems, they are not able to spare much funds for the infrastructure sector which has huge requirements. Therefore, there is a need for more institutions like IIFCL and IFCI, which are development financial institutions. Also, more sectoral and more institutions are needed to fill in the vacuum that is being created by the retreat of some of the public sector banks from infrastructure.

According to Sunil Srivastava, Managing Director, BARSYL, 'The success of all these instruments introduced by the government can only be seen in the coming months when the funds are deployed in sound projects and so generate returns. It is rather difficult to comment on this at this particular juncture, since the infrastructure sector itself has still to pick up steam.'

That said Neeraj Gupta, Principal Investment Officer, Transaction Advisory Service, International Finance Corporation (IFC) believes that in the last five to seven years, deals and financing were quite subdued for the infrastructure sector. But now, the number of deals taking place in the market is picking up, and that is happening across geographies in emerging markets.

Citing an example Gupta says, 'the state government of Odisha was looking for ways to increase clean energy production. In 2013, it sought IFC's assistance to develop a pilot rooftop solar project in Bhubaneswar and Cuttack to kick-start the market for rooftop solar projects in the state. IFC also helped Bhubaneshwar in improving its street lighting infrastructure.

There is another trend of newer avenues opening up to the private sector. The core infrastructure sectors will continue to lead the deals for the private sector involvement, be it highways, expressways, ports, airports, renewables or power generation assets. Newer sectors, such as transportation and railways, are likely to see a strong involvement of the private sector. Additionally, a lot of activity is being witnessed in healthcare (both greenfield as well as brownfield), agribusiness, industrial corridors and cities. Another core area of infrastructure financing that is happening is in cities and urban areas to accommodate the growing population.

The infrastructure sector is plagued by balance sheet distress that reflects in mounting debt and deteriorating debt service metrics. It was evident that short-term loans given for long-term projects not only increased the non-performing asset (NPA) levels of banks but also amplified the debt burden of companies that were already stressed.

In addition, the credit portfolios of companies were affected by external factors, including aggressive bidding, leveraging and a slowing economy.

According to ICRA estimates, Rs 30 lakh crore was invested in the infrastructure sector of which about Rs 11 lakh crore came by way of debt. Further, as per the Reserve Bank of India's recently published data, deployment of gross bank credit to construction and infrastructure sectors is Rs 81,600 crore and Rs 8.88 lakh crore respectively. Major holders of outstanding debts in the infrastructure sector were the power sector with a gross credit of Rs 5.24 lakh crore, roads with Rs 1.71 lakh crore and telecom with Rs 83,000 crore.

That said, every sector is grappled with various challenges. Crisil Infrastructure Yearbook 2017 lists some of them. In case of power, slippages in the UDAY target would result in significant cash losses for distribution companies (discoms), leaving them gasping for working capital finance. Increase in tariff, as prescribed under UDAY, is proving to be a major challenge as many state regulators appear undecided on the tariff hikes. As many as 25 of the 27 states have revised tariffs. Because tariffs remain a state subject, the success of UDAY will hinge on the buy-ins of state regulators to a large extent.

For railways, steady growth of both freight and passenger traffic has resulted in congestion in major parts of the network. This necessitates large investments in network expansion and decongestion projects. However, there has been consistent under-investment in capacity expansion. In addition, large investments were made in a number of unremunerative, but politically sensitive passenger-oriented lines.

Backlog in safety-related infrastructure, including that of track renewals, is one of the biggest challenges facing Indian Railways. Out of 64,000 km of tracks, over 7,000 km are more than 30 years old and need immediate replacement. In addition, over 4,000 unmanned rail crossings need to be eliminated. Years of under-investment has only exacerbated the situation and needs to be tackled on a war footing now.

In case of roads, currently, there is aggressive competition among developers willing to take up projects on the EPC or HAM modes. Some HAM projects have been awarded for as low as 65 per cent out of 70 per cent of the reference bid project cost. This is reminiscent of 2008û2012, when aggressive bidding for DBFOT projects by private developers led to a dramatic reduction in project completion and created nonperforming assets. Further, due to past experience, banks are following stringent lending norms. More than 10 HAM projects have been unable to achieve financial closure because of weak financials of developers or bank's perception of risks associated with these projects.

Over the past seven or eight years, land acquisition has emerged as one of the biggest challenges for capex in general and infrastructure projects in particular. The passing of the LARR Bill (Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act) has made the land acquisition process lengthier and more challenging.

  • A target of Rs 131,000 crore has been made for capex for the railways.
  • Power sector's proposed outlay is Rs.16,320 crore, involving GoI support of Rs.12,319.50 crore. 
  • The GoI, along with the states, proposes to spend Rs.88,185 crore in PMGSY.
  • A capex of Rs.6.92 lakh crore over the next five years for 83,677 km of roads has been planned.
  • Sagarmala programme has undertaken 150 projects worth Rs.16 lakh crore.
  • Metro projects worth more than Rs.2 lakh crore are in various stages of approvals and are likely to come up for bidding.

- Rahul Kamat
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