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Though the Centre has chalked out ambitious infrastructure plans, a multi-rate GST, and the DND toll cancellation issue, may dampen the spirit of the infra industry.
Union Minister for Road Transport and Shipping Nitin Jairam Gadkari´s well laid out plans to kick start an infrastructure boom in India that would drive up economic growth and development, through private sector finance, faces the prospect of being waylaid.
The Goods and Services Tax (GST) Council, after several rounds of deliberations, finalised seven different rates of the tax for goods, and two distinct rates for the services sector in India.
While infrastructure majors (developers) and EPC contractors are still to come to terms with actual implications of the new tax regime, a recent ruling by the Allahabad High Court froze further toll collections on the Delhi-Noida-Delhi flyway.
Concerns were raised within industry about a negative precedent that may have been set. After all, the DND flyway had committed toll rights till 2031, that have been curtailed by more than 15 years. This could not have come at a worse time.
The infrastructure industry was being engaged proactively by Gadkari and his colleague Suresh Prabhu (Union Minister for Railways), with the former taking the initiative to make infra-building a bankable proposition for the private sector. In view of the waning interest of developers and EPC contractors for the PPP model, Gadkari (read the Union Government) has emphasised the hybrid annuity model (HAM), reducing financing risks for developers and contractors in the infrastructure sector. In January 2016, the Cabinet Committee on Economic Affairs had approved HAM.
A recent report by India Ratings and Research (IRR) titled ¨Infrastructure and Project Finance¨ indicates a positive outlook for the sector in the wake of a proactive policy and governance stance by the Centre.
¨Sponsors of completed projects could be eyeing a potential release of Rs.84.5 billion worth of equity by divesting their stakes across 47 completed projects owing to the 100 per cent exit option that was approved by the National Highways Authority of India. The IRR report further notes, ¨Although the mode of awarding projects saw a mild uptick in the current fiscal (2016-2017), the space was mainly dominated by EPC.¨
¨Fifty per cent of upcoming projects (in terms of project length) are likely to be awarded under HAM, while EPC would be the preferred mode for 26 per cent of projects,¨ says IRR.
These proactive steps were necessitated by the waning private sector interest in the PPP model being hawked by the government. ¨Reduction in private sector share in National Highways Development Project (NHDP) financing (from a peak of 67 per cent in the 2013-14 fiscal down to 34 per cent in 2016-2017) pushed budgetary allocation for the Ministry of Road Transport & Highways up by 48.8 per cent (Rs.1,032.86 billion) in the 2016-17 Union Budget, as against the 2015-2016 revised estimates,¨ the IRR report states.
Another report on Real Estate and Infrastructure by PwC, points out, ¨Infrastructure-linked real estate development around infrastructure, mainly transport nodes like airport, railway stations, urban transport and ports, is seeing increasing interest in India for a dense development driven by two major aspects - land value capture as a source of infrastructure financing and economies of scale. The size of the investment opportunity is estimated to be about $20 billion over the next five years.¨
The need for innovative finance mechanisms, such as ¨municipal bonds with credit rating of ULBs, pooled finance mechanism (PFM), and Tax Increment Financing (TIF). Leverage borrowings from financial institutions, including bilateral and multilateral institutions, both domestic and external sources. States/UTs may also access the National Investment and Infrastructure Fund (NIIF).¨
The report further states, ¨Aerotropolis or city-side development as it is termed, is estimated to attract investment of over $2 billion over the next five years in city-side real estate and related infra development. Additionally, proposed greenfield airports are expected to attract investment of over $6.6 billion for airport terminal building and infrastructure development by 2020.¨
However, the report notes that the financing options would be limited and would therefore need to be bolstered by additional funding through user fees and innovative financing methods. ¨Financing of Smart City Mission: The Union Government funds and matching contribution by states and urban local bodies will meet only a part of the project costs. Balance funds are expected to be mobilised from the resources of states and ULBs, collection of user fees, beneficiary charges and impact fees, land monetisation, debt and loans,¨ it states.
According to the IRR report, the 37 road projects (under construction and completed) exhibit higher stress levels. IRR found around Rs.255 billion worth of project level debt that was bid out on build, operate and transfer projects by NHAI to be under stress.
¨Unfavourable macroeconomic conditions, slippages from the original project timelines, lower traffic performance, and higher debt levels are the key reasons for the strain visible on project cash flows. Unless the projects undergo a structural change, say, in terms of additional money infused by the sponsor (which seems difficult), debt restructuring or refinancing, the projects´ credit metrics are unlikely to improve substantially,¨
the IRR report notes, adding that with the projects being over-leveraged by 19 per cent, things could get compounded. Other areas of concern pointed out by the IRR report include the reluctance of the banking sector, whose exposure to the highway sector declined to 7.1 per cent (Rs.1,794 billion) in 2016-2017 from 7.7 per cent (Rs.1,675 billion) in the 2015-2016 fiscal. This trend is likely to continue, according to IRR.
An additional 73 per cent spurt in land acquisition cost was witnessed in the last two years by NHAI, corresponding to an increase from an average of Rs.7.8 million per hectare in 2013-14 to Rs.13.51 million per hectare in 2015-2016.
¨Acquisition cost increased by 13 per cent in 2014 and 33 per cent in 2015. Rajasthan, Madhya Pradesh and Tamil Nadu saw the highest quantum of land acquisition between 2011 and 2016, while Kerala, Meghalaya and Himachal Pradesh witnessed the lowest land acquisition during the same period,¨ according to the IRR report, which anticipates debt close to Rs.35 billion that could be refinanced in the near future.
The Debt Service Reserve Account (DSRA) has been part of the project cost in only 23 per cent of the sample projects. While 77 per cent of the sample projects exhibited reserves equivalent to three months´ debt servicing, the balance have it for six months. A total of 57 per cent of projects having DSRA of six months are annuity road projects, and 71 per cent of projects have raised debt by issuance of non-convertible debentures (NCDs).
The IRR report expects the DSRA requirements to increase mainly because NCD will be replacing bank loan financing, especially for annuity projects, and the ballooning repayment structures, as 40 per cent to 50 per cent of the debt gets repaid in the last five years, for most infrastructure projects.
It further points out, ¨The Hybrid Annuity Model (HAM) would be the mainstay to bid out projects in the next couple of years, mainly due to the lukewarm response in the BOT space, stretched liquidity position of developers and nil traffic risk.¨
As per recent NHAI data, 86 per cent of projects in the request for proposal (RFP) stage are likely to be awarded on the HAM/EPC model, while the balance will be implemented on the BOT model. For request for qualification (RFQ) stage projects, HAM has accounted for 78 per cent and remaining are to be awarded on BOT.
The PwC report also points out the hurdles to raising infrastructure financing. ¨Securing capital from domestic private investors and foreigners remains one of the biggest hurdles to the Smart City mission. A Special Purpose Vehicle (SPV) is proposed for implementing the mission; however, current guidelines do not provide adequate safeguards for private sector participation at the SPV or sub-SPV levels. What would be needed are policy changes at the Central and state levels to enable investments from various types of investors at the SPV and/or sub-SPV levels with adequate safeguards,¨ states the report.
It adds, ¨Real estate development around infrastructure, mainly transport nodes like airports, railway stations, urban transport and ports, is seeing increasing interest in India for a dense development driven by two major aspects - land value capture as a source of infrastructure financing and economies of scale. The size of investment opportunity is estimated to be about $20 billion over the next five years.¨
The PwC report emphasises the need to address hurdles in the infrastructure space and states, ¨There is a need to evolve better risk revenue commercial structures to facilitate private sector partnerships.
Land monetisation by Metro rail operators or authorities, Railways, and bus transporters is estimated to be worth over a $30 billion investment opportunity over the next 10 years. The government needs to work out investor-friendly commercial structures while ensuring transparency and accountability in the transaction process.¨ Infrastructure plans include major industrial corridors across the country such as the Delhi-Mumbai Industrial Corridor (DMIC), Vizag-Chennai Industrial Corridor (VCIC) and Chennai-Bengaluru Industrial Corridor (CBIC). Similarly, the Indian Railways has proposed commercial development of 400 railways stations of ´A1´ and ´A´ category through private sector participation, at an estimated investment of $16 to $20 billion over the next decade.
The BEST Undertaking, Mumbai´s second largest public transporter, is considering transport-cum-real estate development on about 200 acres of land plots spread across the city over the next 10 years. Similarly, state transporters like MSRTC, BMTC, KSRTC, GSRTC and others across India are considering similar approaches to augment revenues.
According to the PwC report, special initiatives have been announced by Delhi, Haryana, Karnataka and a few other states to create Transit Oriented Development (ToD) policies and regulations to support densification along project influence zones. ¨BEST Undertaking and Indian Railway Station Development Corporation (IRSDC) have appointed consultants to prepare commercial strategies for land asset monetisation. Central, state and local governments are joining hands to modernise public transport facilities while monetising associated land assets, for instance, in the Surat and Gandhinagar railway stations´ redevelopment,¨ the PwC analysis states. There are 24 industrial nodes proposed to be developed in the DMIC, 12 of these shall be developed under Phase-1 and remaining 12 in Phase-2. Each of such industrial nodes is being planned in a holistic way and shall comprise industrial development, urban development and infrastructure development. These industrial nodes will act as economic centres and would generate employment opportunities.
Other financing options
The government has earmarked Rs.14,000 million for the Delhi-Mumbai Industrial Corridor project in the previous budget. In a major impetus to the proposed Visakhapatnam-Chennai Industrial Corridor (VCIC), Asian Development Bank (ADB) has agreed to fund Rs.21,000 million for the first phase of the project. This shall lead to increase in population as well as its concentration. For instance, as a part of VCIC, it is estimated that about 10 million incremental population will be added to the existing population owing to the direct and indirect job opportunities that will be created due to industrial growth.
The PwC report states, ¨Globally, the major sources of long term financing for infrastructure are insurance, pension, and sovereign funds, who seek long-term investments with low credit risk.¨
The report adds, ¨NBFCs will continue to play a complementary role to banks as providers of infrastructure finance. Recent regulatory changes have allowed NBFCs to access foreign capital via external commercial borrowings and channel it to infrastructure projects.¨
For India´s infrastructure sector, the die is cast, and industry would like to take to the next round of infrastructure development, provided the regulatory and policy frameworks are customised to encourage infra development.
Sources of Funding for NHAI