Kingfisher moments in infrastructure

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SummaryThe government’s ambitious $1 trillion target for infrastructure investment in the 12th Five-Year Plan has many interesting dimensions to it.

Developers may support projects that have long-term economic value instead of propping up all projects to please banks

Srinivasan Nandakumar

The government’s ambitious $1 trillion target for infrastructure investment in the 12th Five-Year Plan has many interesting dimensions to it. While clearly the quantum of investment envisaged is huge, it would also appear essential given the country’s massive shortage of adequate and quality infrastructure–be it in transportation or energy or different components of urban infrastructure.

From an economic strategy perspective also, channelling investments into the sector holds immense potential to galvanise the present phase of sluggish growth. However, the push for investments into infrastructure projects comes at a time the sector itself is in the throes of acute stress.

Anecdotal evidence suggests that bank funding for new projects has practically dried up or, at the very least, considerably slowed down. There has been a virtual pendulum swing--from an environment of extreme eagerness to fund to a near-complete freeze.

Equity markets–both public and private–also seem to have lost interest in the sector. The current stress—resulting in some payment defaults and forced restructuring of loans—has been brought about not only by external factors (e.g., delays in land acquisition and environmental permits) but also by an inadequate appreciation of the risks inherent in funding infrastructure projects, coupled with sub-optimal financial structures (e.g., inadequate provision for contingencies, absence of or inadequate reserve accounts, etc.).

India Ratings continues to have a negative outlook for infrastructure projects as a whole in India. The agency expects a further intensification in many previously identified macroeconomic challenges, including equity capital constraints, high interest rates, slowing GDP growth and currency depreciation, and sector-specific stresses, including fuel (coal and natural gas) shortages, weak off-takers (power distribution utilities in many states), execution delays for power and prospects of slowing traffic growth for transportation.

Project sponsors’ inclination to extend non-contractual support to projects funded on a non-recourse basis has somewhat cushioned the extent of stress. However, given their stretched balance sheets, sponsors will struggle to raise funds for a growing number of construction projects and support under-performing assets, largely because stock markets remain weak and volatile. This may force developers to selectively support projects that have long-term economic value in contrast to their earlier strategy of attempting to preserve vital bank relationships by propping up all projects. Such a scenario could trigger more project loan defaults or necessitate debt restructuring programmes.

Although interest rates appeared to have peaked earlier in the

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