Vinod Behl
Despite an impressive economic recovery over the last quarter, several bottlenecks still pose some challenges. One of the major challenges faced by the infrastructure sector pertains to financing. In 2015, the government had set up a ₹40,000 crore National Investment and Infrastructure Fund (NIIF) for enhancing financing for greenfield, brownfield and stalled projects. However, NIIF’s equity spend over the last five years averaged less than ₹5,000 crore. NIIF’s equity investment stood at ₹4,689 crore while the co-investment made by its partners amounted to ₹7,053 crore at the end of September 2020. The total investment stood at ₹11,742 crore.
The capital crunch, along with land acquisition and other issues have been leading to time and cost overruns of infrastructure projects. According to the December 2020 report by the Ministry of Statistics and Programme Implementation, as many as 450 projects, each worth ₹150 crore or more, have been hit by cost overruns amounting to more than ₹4.28 trillion. The projects’ cost increased by about 20% - an increase from ₹21,44,627.66 crore to ₹25,72,670.28 crore.
The States account for up to 40% of the total infrastructure capital expenditure. In 2019-20, the States spent a combined 2.9% of GDP on capex while the Centre spent 1.65%. In 2020-21, the aggregate expenditure of States would fall to just 1.5%. The budgeted capital outlay for 2020-21 is ₹5.7 lakh crore and 12 major States have to cut capex by 2.7 lakh crore in FY 21. According to rating agency ICRA, there is likely to be a 40% cut in capital outlay for infrastructure. The rising debt of NHAI (projected to reach ₹3.5 trillion by FY 23) from ₹75,385 crore in FY 17 is worrisome. The debt-laden Infrastructure Leasing and Financial Services Group (IL&FS) has an uphill task to address the pending ₹56,000 crore of its debt by 2021-22. Out of the overall debt of over ₹99,000 crore (as of October 2018), it has, so far, managed to address ₹32,000 crore. Another disturbing aspect is that outstanding dues in power generation companies were up 35% to ₹1,41,621 crore in November 2020.
Then there are projects facing a funding challenge from banks. According to RBI, bad loans could rise to a 20-year high by March 2021, once moratorium lifts. Then, banks may well shy away from funding new projects. The funding woes have severely impacted the contractors (lowest in the chain); their credit cycle has almost doubled from 3 months to over 5 months.
Notwithstanding these challenges, there have been several bright spots which hold hope for sound infrastructure growth in the coming times. According to rating agency CRISIL, EPC companies engaged in road construction have reached their pre-Covid levels, with labour and raw material problems largely resolved. Due to the massive disruption caused by the lockdown, EPC companies saw their operating level coming down by 30%, and revenue growth for the June 2020 quarter plunging by 33%. However, the companies managed to maintain healthy profitability due to cost reductions.
Large road EPC players are expected to see their revenues recover with an estimated 15-20% growth in 2021-22. This pick up is reflected in the performance of highway construction. In the current financial year, 8169 km of national highways were constructed (at the rate of 28.16 km per day) from April 2020 to January 15, 2021. During the same period in FY 20, 7573 km of highways (at the rate of 26.11 km per day) were constructed. The Highway Ministry is hopeful of topping the construction target of 11000 km by March 31, 2021 It awarded 7597 km long highways during 2020-21 against 3474 km long highways during the same period in 2019-20.
NHAI has developed a vendor performance evaluation system to track the performance of developers, consultants, and concessionaires, for speeding up work on projects. According to highway minister, Nitin Gadkari, when he took charge, 406 projects worth ₹3 lakh crore were stalled, and now, after terminating 41 projects, 95% of the remaining projects have been restarted. According to ICRA, liquidity boosting measures for the highway sector have helped in reducing the cash conversion cycle, while also getting the performance guarantees and associated margin monies released for the executed portion of the projects.
A number of policy reforms have been undertaken and carried out by the government to boost infrastructure development. The Earnest Money Deposit (EMD) and performance security on government and public sector lenders has been relaxed for both existing and new contracts from the Centre and PSEs, leading to lower working capital requirements. Funding requirements will also ease due to EMD relaxation for new tenders, thus improving execution capabilities of companies. To boost the liquidity of contractors, their payments have been fast tracked. According to Sukhbir Singh Sandhu, Chairman, NHAI, the system of monthly payments has helped ease the liquidity position of contractors.
The policy initiatives taken to boost funding to the infrastructure sector are critical. Last November, the government extended the viability gap funding scheme for public- private partnership projects till 2024-25, with a total outlay allocation of ₹8,100 crore. To encourage foreign funding in the infra sector, last year, the Income Tax Department notified tax exemption on interest dividend and capital gain incomes of Sovereign Wealth Funds and Global Pension Funds, arising from their investment in Indian infrastructure. A funding of ₹6,000 crore for NIIF for two years was okayed to help it mobilize additional capital to implement new projects.
The government’s progressive reforms and new models of financing are boosting the confidence of domestic and foreign investors. There are now better models than TOT (toll-operate-transfer) and there is 100% FDI allowed in this. The World Bank will be funding $500million to develop highway corridors. Global investment fund KKR has raised $3.9 billion in the biggest infra fund in Asia, targeting opportunities in India, besides Korea and the Philippines. PFC is going to raise ₹10,000 crore via NCDs in two tranches and 75% of the proceeds will be used for onward lending, financing, refinancing the existing indebtedness or debt servicing.
REITs and InvITs are emerging as popular funding instruments for infrastructure sector involving domestic and foreign investors. Since the launch of the first InvIT in FY 2018, AUM has logged 42% CAGR to ₹2 lakh crore. According to CRISIL, InvITs and REITs can raise 8 lakh crore to take their AUM to 10 lakh crore in the next 5 years. NHAI is looking to raise ₹65,000 crore each in the next and following fiscal - banking on funding models like InvITs. Canadian Pension Fund, besides NIIF and LIC, are keen to invest in it. Power Grid Corporation of India aims to raise ₹5,000 crore through InvIT IPO to use the proceeds to fund new and under-construction capital projects. About 75% of the offer is open to institutional investors. This is the first InvIt by a power PSU. Suresh Goel, MD & CEO, NHAI’s InvIT says that there are assets to monetize in power transmission, gas pipeline and oil storage.
That foreign institutional investors are showing great interest in InvIts and REITs is also evident from the likely investment of $500 million each by Public Investment Fund (PIF), Abu Dhabi Investment Authority (ADIA), to acquire a total 51% in the InviT formed by RIL to monetize its fibre optic network assets. Recognizing that InvIT and REIT model has the potential for long-term funding of infrastructure development, the FY 22 budget has provided flexibility to InvITs and REITs to raise more investment.
Other key budgetary provisions to meet long-term financing needs of infrastructure sector include proposed Development Financial Institution (DFI) with initial capitalization of ₹2,000 crore and lending portfolio of at least ₹5 lakh crore, record capital expenditure of ₹5.54 lakh crore for FY 2021-22, providing more than ₹2 lakh crore for States and autonomous bodies for their capital expenditure, extending ₹111 lakh crore National Investment Pipeline (NIP) to cover more projects by 2025, and setting up of Asset Reconstruction Company.
There are some more important policy reforms that are in the offing to boost infrastructure development. To ensure easier entry for domestic companies in road projects, a major rejig in eligibility criteria for EPC projects, including easing of financial, technical criteria, is underway. As a policy reform, NHAI is set to introduce performance threshold for highway bidders by ranking concessionaires based on their performance on various parameters, including safety, frequency of accidents on the stretch, and road and toll plaza management systems, among others.
The Centre is also working on new norms on lending for hybrid annuity projects in order to reduce risks in road construction projects and also to cushion banks. The idea is to spread the risks in a project over multiple banks as distinct from one bank - which is the case now. All this policy push holds good prospects for infrastructure development. Also, as infrastructure plays a big role in real estate development, all these measures bode well for the growth of the real estate sector.
(The writer is Editor, Proptoq - a real estate magazine)
