The underbelly of the core sector has begun to reflect the concerns expressed by Prime Minister Manmohan Singh recently about the country?s ability to raise the $500 billion needed for infrastructure development in the next five years. Of the 27 highways projects that were scheduled to be awarded by November this year, 17 have seen bidders withdrawing from the process at the financial bidding stage.
The bidders making an exit from the highway projects include construction majors such as Hindustan Construction Company, GMR Infrastructure and Larsen & Toubro. ?Players are withdrawing because they are facing problems in getting finances,? a senior official with a highway development firm said, hinting that the liquidity crunch has started hurting the sector. The minimum net worth required by a company to participate in the projects is 25% of the project cost.
So while Rs 60,000-crore highway projects are up for grabs, funding is emerging as a major issue the developers have to deal with. Road builders, used to funding projects via funds borrowed from domestic and global markets, are finding the going tough thanks to the global financial meltdown. Moreover, domestic banks have become highly selective in disbursing loans for such projects.
?This is indeed a difficult situation. There are no alternative sources to fund the projects. Options like private equity, private placements and IPOs cannot be exercised as the global markets are currently down. In case all the 60 highways projects worth Rs 60,000 crore are awarded, it will certainly be difficult to fund them,? said Amrit Pandurangi, head of India infrastructure, PriceWaterhouse Coopers.
?The foreign partners are not willing to finance the projects due to liquidity crunch. The banks are asking for a rate increase mid-way for ongoing projects? loans. This will affect the feasibility of the projects, as the cost would increase while returns would remain the same. We have got sources of internal funding but we cannot meet the entire project cost. Loans are definitely required,? a top official with Madhucon Projects Ltd said.
While commodity costs and crude oil prices are sliding, high cost of inputs still pose a problem for highway developers as vendors have changed credit terms. ?Earlier, high-speed diesel and bitumen, which is a major input in road construction were provided by the oil marketing companies on credit to be paid in 15 days. However, they have stopped credit last week. Now, we have to make payments for these materials upfront in cash or draft,? Murali said.
?The entire issue of liquidity crunch can be seen in two perspectives. First, for all those who have already won projects, increasing interest rates is certainly a dampener. While putting the bids, they must have expected a rate at around 11-12%, which has gone up to around 13-14%. This will increase their project cost. However, all those who are yet to bag the projects still have time with them,? said Pandurangi.
Explaining the scenario, National Highways Builders? Federation director general M Murali said, ?In the current scenario, the next three to four years are unpredictable as far as the equity markets are concerned. Almost all the PPP projects are long-term projects. The banks would not be in a position to sustain the projects for long, as they do not know what would be the interest rate scenario in the future. In this case they have two options. Either they discourage lending till markets and interest rates stabilise or they lend at a higher rate?.
The funding by the banks depends on scrutiny of the detailed project reports (DPRs) and traffic data in case of the road projects. However, the DPR and traffic data may not be as promising in all the cases, Murali added.
Bankers are also sending feelers that the interest rate for long-term lending will be in the range of 20% to 22%, he said. Considering the normal fund sharing between financers and promoters at 3:1, funds to the tune of Rs 45,000 crore are required from banks for the execution of the projects.
Banks agree that shortage of funds have affected highway projects. ?Due to the liquidity situation, banks were facing a lot of problems. There are many factors that are beyond the control of the developers and may delay the project and hence interest payment. Under these circumstances, it is very natural to arm-twist. All banks are trying to pass on the interest rate hike to these projects,? a top official with a public sector bank said.
As per RBI norms, if a developer fails to pay interest on the loan for two years till the projects begins operations, the loan becomes a non-performing asset (NPA) and banks have to make a provision for the same. After the commencement, default in servicing interest for a continuous period of three months makes the loan an NPA. Infrastructure along with housing and real estate accounts for 18-20% of the total advances by banks.
The fall out of all this was mainly felt by small developers, which were unable to arrange for minimum they had to put in on their own.
?The banks don?t finance the entire project and 3:1 ratio is generally adopted to given loans, whereby 75% of the cost is financed by banks. Due to all this, small developers were the hardest hit,? Murali said. Som Datt Builders, which executes road projects for BoT operators, has been facing problem in raising funds for the projects. ?We are executing road projects worth Rs 2,000 crore in the country. However, only 40% to 50% of the funds required for the projects have been tied up,? said a company official.
To tide over this acute shortage of funds, the developers are also looking for departmental funding and others sops from the government. ?Long-term loans should be provided on reimbursable basis by the government,? said a national highways developer. ?NHAI provides 10% advance for its projects. These advances should be made interest-free to help us cope with the situation,? said an official from Gammon India Ltd.
Some bankers have also reduced the working capital limit available to project developers. ?Due to the liquidity crunch, banks had an uneasiness in funding infra project in the tier-II cities. The real impact was seen as banks reduced the working capital limit of developers, as they were not using the entire limit. This was also done due to the fear that one corporate would start funding the project of another utilising the working capital limit from banks,? an official of another bank said.
Seeking to enable India Inc to raise more funds, RBI has relaxed the external commercial borrowing norms and reduced the regulatory deposit ratio in the domestic market. However, neither bankers nor project developers think that the measures would for certain increase the flow of funds in the economy.
?After the RBI eased the liquidity situation, the credit to the infrastructure sector would depend on how much funds are actually available with each bank and at what rate banks are mobilising funds,? a banker said. Pandurangi said the benefits of ECB liberalisation would only be felt after the global financial situation stabilises.