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A recent report by rating agency India Ratings & Research (Ind-Ra) maintains an overall negative outlook for the infrastructure sector for FY15. Though this might not apply for availability based road projects and the rated airports, the outlook remains negative for toll roads under construction as well as those in early stages of operations along with minor seaports.
In another report, Crisil Research says that cost overruns and delays in projects coupled with significant slowdown in traffic growth have severely impacted viability of highways projects. The research agency’s report is based on analysis of 15 national highway stretches. "Project returns today are in the 8-14% range — less than half the 22-26% arrived at based on National Highways Authority of India NHAI’s traffic and cost estimates,” the report adds.
According to industry sources, some of the reasons that are compelling developers not to take up large infrastructure and road projects are liquidity constraints, approval delays and the lingering slowdown.
Chintan Lakhani, associate director (infra and project finance), India Ratings, says that the National Highways Authority, last September, had insisted the government award projects as cash contracts. “This was primarily because of the lacklustre response that NHAI had witnessed in awarding projects through the PPP model.”
According to a top official of an infrastructure company who seeks anonymity, there are few bidders for infrastructure projects especially when they are still in the planning stage. He adds, “There are a large number of infrastructure projects that are in the planning stage and some under the bidding stage. One could attribute it to the current humdrum of election activity in the country and the drive to break an infrastructure logjam to revive the economy before the forthcoming general election.”
Some time back, the government had emphasised on developing infrastructure projects on public private partnership (PPP) model to reduce its burden while encouraging private sector participation. However, the current economic scenario is impacting developer sentiment who are unwilling to take the risks attached with PPP projects, according to the official.
What is adding to woes is the new land acquisition laws enacted by parliament last year came into effect in January this year. Known as The Right to Fair Compensation and Transparency in Rehabilitation and Resettlement Act, 2013, this legislation is aimed at ensuring that land owners are offered fair compensation for land taken away from them for various projects. Under the Act, land owners should get up to four times the market value in rural areas and twice that in urban areas. Developers are concerned that this will prove costly and require larger financial assistance from the Centre as most of them are already reeling under the burden of premium payments.
According to Lakhani, “Especially for toll-based highways or BOT projects, there has been a significant meltdown in traffic growth last couple of years. We have seen that the estimates made by the NHAI are not in keeping with the traffic real time. This is a dampener and can delay the bidding process, not to mention jeopardising infrastructure companies’ interests.” It’s estimated that overall traffic growth has remained weak in the current fiscal and will continue to languish around 3-5% over the next year.
The cost overruns of road and highway projects are also straining finances.
Lakhani says, “Delays in project schedules are posing a threat to the financial viability of projects. Infrastructure financing in India has to work its way out of
two fundamental problems before credit quality can start to improve significantly.”
In the report, Ind-Ra mentions the two problems: First, the system has to work itself through numerous excesses of the past including aggressive bidding, weak and inexperienced sponsors, poor project planning, high leverage, weak financial structures and revenue over-estimation.
Secondly, the constraints imposed by a harsh external environment – slowing economy, rising interest costs and depreciating currency, difficult equity market an policy uncertainty – have to be overcome.
S. Nandkumar, senior director, global, infrastructure and project finance, Ind-Ra, says, “Developers need to find a way out to assure correct financing of the project. For instance, when the financials of a project are being taken into consideration, the economy could be on the upswing. By the time the project is in execution, there could be a slowdown.”
He says that developers need to work with rigorous sensitivity analysis (or stress case scenarios), conservative forecasts, and moderately leveraged capital structures to better reflect cash flow generating ability of the project and build adequate cushion in the form of reserves that will allow cash flows to absorb the effects of economic shocks on revenue.
Over the last few months, the situation has become unrelenting as some large projects have been largely delayed due to cost overrun of nearly 25%. Most of the delays have been attributed to financing availability and land acquisition issues.
According to the Crisil report, the calculations of many road developers have gone awry. “Our analysis shows five out of six projects have an average debt service coverage ratio (DSCR) of less than one in the first five years of operations. This means, if there is no additional capital infusion, developers will find it difficult to service loans," it stressed.

Numerous stakeholders expect a sharp turnaround in the fortunes of the sector following the elections in H1-14 and an uptick in GDP growth (Ind-Ra forecasts 5.6% for FY15 as against 4.9%for FY14).
However, the agency does not expect a spectacular improvement in the short term. The path to a sustained recovery, if at all, will be gradual and will have to be traversed with measured steps.
The availability of adequate infrastructure facilities is indispensable for the overall economic development of any country. It helps determine success in diversifying production, expanding trade, coping with population growth, reducing poverty and improving environmental condition. Though there is no clear-cut answer whether infrastructure investment causes growth or does growth cause infrastructure investment, there is a strong association between availability of infrastructure and per capita GDP.

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