Column : Lipstick on a pig

Written by Sunil Jain | Updated: Dec 18 2012, 06:45am hrs
Now that the National Investment Board/Cabinet Committee on Investments (NIB/CCI) has been cleared by the Cabinet, chances are the focus over the next few weeks, indeed months, will be on the projects taken up by it and how it has been able to, or not been able to, kickstart Indias badly stalled investment process. Will Posco come to the CCI or wont it given how, at environment minister Jayanthi Natarajans insistence, the CCI has no appellate powers And what about Vedanta

Much of this, however, seems to be missing the wood for the trees. Going by the finance ministrys statements, India has around R1.3 lakh crore of projects that are stuck due to some clearance not coming through. So now that the CCI has come through, the argument goes, these projects will soon get cleared. Its true that many banks dont have the headroom to lend much more to infrastructure projects, but that has been resolved by pushing through the concept of Infrastructure Debt Fund (IDF)so once SBI, say, sells its loans in, say DIAL, to IDFCs IDF, this will create more space for SBI to be able to lend again. Thats the logic: wherever there are obvious gaps/problems, a diligent government is finding solutions.

Thats obviously the way to go, but its important to keep in mind this may be barking up the wrong tree. For one, getting banks to hawk their better-performing infrastructure loans to IDFs may actually make their books look shakier.

Two, consider a new telco that bids R12,000 crore, say, for a pan-Indian 2G licence (thats roughly the base price today). Will a bank, any bank, be willing to lend R15,000 crore or so to fund the telcos licence and capex when it knows the market leader Bharti Airtel has been seeing pretty disappointing results for several quarters now and when it is up to its neck in debt with a debt-ebitda of an uncomfortable 2.8 times projected for FY13 More so when it knows the governments new policy of a high one-time entry fee combined with a high annual spectrum/licence fee makes (http://goo.gl/C6zTA) the business totally unviable.

Or take a power project looking for financing. Given the sectors annual losses have more than quadrupled over the last 5 years to R80,000 crore in FY12, and no clarity on whether SEBs will be able to pay for the power even after the loan restructuring just announced, which bank will want to fund such a project More so since there is also no clarity on whether there will be coal available.

And how do you lend more to a gas exploration company if there is no clarity on how prices will be determined and whether the company even has the freedom to market the gas And though ONGC may be a Navratna company and a blue-chip, how do you lend money to it when you dont even know how much of its revenues will be sequestered for subsidy payments this year The list can be expanded endlessly and were not even talking of the number of the so-called stalled projects that simply dont make sense any more given the state of world demand and the dramatically excess capacity in some sectors. The finance ministry or the CCI secretariat would do well to do this exercise.

The larger point of this column is that unless a way is found to alleviate stress levels for existing units, its unlikely any large number of new units are going to come upin any case, given cash flows, its always easier for existing units to expand. But even existing firms cant expand in the face of unfriendly policy. In telecom, for instance, getting in more capex means the government has to give up its insistence on a large annual revenue share of around 13-14% of turnover along with a high upfront one-time entry fee financing which will cost roughly the same amountif an upfront fee has to be charged, the annual charges have to be brought down to just around 1-2%. If this is not done, forget new players, even the older ones will be in trouble.

Similarly, India Incs debt overhang has to be taken into account (see table). Its obviously important to clear as many road projects as possible, and to ensure they get their forest clearances in timeand this is a big issuebut its a good idea to look at whether the big road developers have the ability to raise their share of equity capital for even the projects theyve taken on.

Getting firms to work off their debt will take time. Debt for GMR Infrastructure, for instance, was a whopping R22,700 crore in Q2 FY12 and this rose to R33,100 crore in Q2 FY13, while PBT fell from R65 crore to minus R23 crore. For Reliance Power, debt rose from R7,600 crore to R17,800 crore between Q2 FY12 and Q2 FY13, while PBT fell to a third, from R129.5 crore to R45.4 crore.

If US banks were guilty, in the run-up to the global financial crisis, of dressing up bad loansputting lipstick on a pig, as it wereto make them look whole, were guilty of a lot worse. Were guilty of thinking its possible to fix the future without fixing the past. Indeed, it could be argued that India Incs high debt levels suggest it hasnt been able to work off the excesses of the last investment bingewho throws another party when the detritus of the previous one hasnt even been cleaned up

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