The pattern of investment in the infrastructure sector is running quite counter to the pattern that you see for other sectors. Where other sectors see potential losses at the current high rates of interest, the pace of investment in infrastructure is gaining steam.
It either means all the infra guys out there can see something the rest of us just can?t?something that should gladden the finance minister, or else the sector is building up a bubble.
Just look at some of the evidence. Infrastructure, for instance, has won a contract to expand a 555-km stretch of Kishangarh-Udaipur-Ahmedabad highway by offering to pay back to the government R668 crore per year. The net present value of the total amount paid over a 26-year concession period works out to R9,000 crore. The cost of the project is R5,500 crore.
Of the 16 projects bid out by the National Highways Authority of India (NHAI) in 2011, for 12 the developers are willing to pay for the privilege of building the stretches. Calculated at net present value, the sums over the lifetime of the projects will earn more than R15,000 crore for the authority.
Going by this trend, if the government bids out R50 lakh crore of projects in the next five years ($1 trillion), the fiscal deficit of the country could be wiped out. The reason why this has happened can be seen in the stock market. The number of infrastructure companies have ballooned while the shelf of projects available are few. This creates an incentive for aggressive bidding to win projects at any cost.
At this point, it might seem patriotic that the government earns from the private sector, but the reason why a road or a port gets built is to service the people. There is no free lunch and the money the project developers will pay the government will show up as higher fees for users. When the rates are not supposed to be changed, the developer will clamour for a change in the contract.
There are several aspects to this bubble. The first is the way bids are evaluated by government agencies. There are currently no norms to decide if a bid is aggressive. A way out could be shadow rating, that Amrit Pandurangi of Deloitte has suggested. It means rating a project?s viability rather than that of the developer. The ingredients used could be land, policy issues and some projections on the returns from the project. Based on such a rating, if a bid is too attractive, that should raise question marks about the viability of the plan. Since the key in road projects is traffic projections, someone in NHAI should have asked the bidders why their assumptions differed so much from the government projection.
This will also help the banks to get a ballpark figure when working towards financial closure. There is no such due diligence in the banks now. In the last three years, the Indian banking sector has gone through wild swings, but there are no press reports of an infrastructure project not having reached financial closure, or even having extended it.
The implication is that banks are possibly failing to discharge their responsibility. As successive RBI deputy governors have pointed out of late, credit to the infrastructure sector from banks has reached an alarming percentage of total credit. In July this year, infrastructure credit has risen by 23.4% year-on-year, a rise of R1,04,199 crore. It is less than the pace of last year, but it is far higher than the average 18.9% rise in non-food credit for this year.
While hard numbers are difficult to come by, banks are broadly lending to most infrastructure projects in a range of 11-12 % rate. This is surprising, as the yield on 10-year corporate bonds is roughly in the range of 11.68%. This is walking on thin ice.
So, if a large reason for the promoters to bid aggressively is sponsored by lack of knowledge within the government and support from the banks for their projects, the third leg is the relatedness of the developer and companies that execute parts of the project. This is not to suggest the government routinely reject bids it thinks are too aggressive. Rather, banks need to be cautious about lending; the government must have a firm no-renegotiation rule, too. Oust promoters once a project goes belly-up and then re-auction it to the highest bidder. This will also ensure more realistic bids.
subhomoy.bhattacharjee@expressindia.com
