A number of domestic factors are equally responsible for this slowdown in growth. Issues relating to land acquisition and environment have been critical factors in the decision to invest. High inflation levels and the consequent increase in policy rates of interest have impacted investment.
International participation in the development and funding of infrastructure in India is essential if the forecast growth spend is to be achieved, and so the timing is right for the authorities to stimulate the market and remove the restrictive barriers of entry and regulatory controls.
One of the key areas that will be critical for the future is the availability of fundsan important distinction to draw when considering the financial elements of an infrastructure project is that between funding and financing. The funding for a project could be defined as its long-term source of support. In the case of public infrastructure, this may be revenues generated by the project, dedicated tax revenues or general resources of the sponsoring public sector entity. The financing of a project is the means by which the funding is leveraged to provide enough up-front cash to purchase construct or adapt the project. While there may be many creative financing vehicles available, once the funding structure is established, all of these financing vehicles will be securitising the same project economics.
The absence of a well-developed financial system facilitating long-term financing has put additional burden on the banks to fill the void. It is risky and limits the lending ability of the banks when they engage short-term funds for long investment in infrastructure projects that have a long gestation period (above five years). To offset this, bank lends on floating rates derived on the base rate. Eventually, the project cost may escalate as it becomes susceptible to interest rate fluctuations.
Most of the build-operate-transfer (BOT) projects awarded last year have not yet achieved financial closure and ongoing projects are languishing as there is no hope they will be completed within a reasonable time period.
The main reasons for the lack of response from the concessionaires to take up road projects are shortage of equity, high interest cost and high construction cost. The highway projects awarded in the past were taken up by the road developers in an anticipation of better economic scenario projected by the Planning Commission, which assumed 9-10% GDP growth that would provide an estimated traffic growth of 13-15% over the concession period, thereby the concessionaire would be able to give high premium to NHAI for bagging these projects.
However, no one imagined the sudden downturn of events in the economy, which put many concessionaires, especially those who quoted premiums for highway projects, under acute financial stress. Due to low GDP growth, the projected traffic revenue of these projects came down to less than 50%, while the payment of premium remained the same with an annual increase of 5%.
The projects undergo maximum stress financially in the construction phase, during which the concessionaires need to put in huge equities into the projects. In this difficult phase, the payment of premium to NHAI turns out to be an additional burden which requires to be addressed.
The guidelines for rescheduling of the premium for the highway projects have to address the concerns raised by the sector as a whole, else it will not only defeat the purpose of the policy but also not help in the revival of the road sector. It is a known fact that because of the flawed exit policy for the road sector announced by the government, it has not been able to attract even a single investment.
Private investors remain committed to increasing investment in the Indian road sector. Investors also want to secure their investments in an easily accessible and predictable business climate with friendly regulatory environment. Improving infrastructure network and better governance and transparency system will have a high impact on Indias attractiveness.
The author is director general, National Highways Builders Federation