Rather than having viability problems, infrastructure projects are typically “front-ended”, so it is often the mismatch between the lending and the project’s revenue-making tenures that lead to an increased likelihood of restructuring, says Arundhati Bhattacharya, MD & CEO of SBI Capital Markets in an interaction with Sumantra Das.
It is often said that infrastructure projects hampered due to lack of strategy planning. What is your experience?
I do not believe that it lacks project vision. If you are looking at Public-Private Partnership (PPP) projects, then there is a PPP appraisal committee in the ministry and then it goes to cabinet committee for investments and then the projects are actually taken up by the promoters. So there are several layers at which it is getting looked at. But many of these projects actually need support in infrastructure in order for it to become viable or they need coordination with various agencies for them to come through on time. For instance, in the case of a port project, if you do not have road or rail linkage it is not going to deliver you the stuff or say a road project, you might need a rail over bridge. So you need coordination with that concerned ministry. When we say it does not have vision sometimes the difficulties that may arise on account of other coordinating or supporting factors sometimes that does not work properly and as a result these infrastructure projects gets hampered.
How do you see proposal of NIB?
Yes. The recent proposal of National Investment Board (NIB) would be really helpful because the board is supposed to look at any of these features where coordiÂnation is required with various ministries, departments and other agencies. Such a mechanism will definitely help in ensuring that these projects come on time.
Do you think that the availability of funds is a major concern for infrastructure companies these days?
No. It is a question of viability of the project and capability of the people who are going to execute it. If you look at the amount of funding that banking sector has put in infrastructure, in 1998 it was as low as 2 per cent and currently it is as high as 31-32 per cent as of March 2012. So money has been there in the sector. There is no doubt that a lot of funding has gone into infrastructure sector. Even today banks are more than willing to lend to projects; however it will depend on the project itself and people who are executing the project. If a developer has the skills for executing the project and the project itself is viable and feasible, there is no reason banks will not fund.
Road developers say lack of funds is a major concern now …
In roads sector, what has happened is on account of tweaking of terms itself it can be treated as an insecure link. Earlier, they were able to assign assets and treated as secure. But on account of change of definition of some of the project terms as well as RBIÂ’s definition of security, these finances and loans could be treated as unsecured loans and if that happen it could be very difficult for people to actually finance road projects.
Besides, the concessions in respect of road projects are now being given for 30 years. Now when that happens, the bidding becomes aggressive. If it is bid out aggressively, the entire project may become a bit unviable because the amount that is given to all these infrastructure projects by banks need to be paid back in 10-12 years. But in the first few years, cash flows are low and so there is a stress. If we could actually allow a repayment period of 20 years then stress would not show up. Because banks have an Asset Liability Mismatch (ALM) problem our deposits are basically 10 year deposits. So banks cannot give a repayment period that way exceeds 10 years as banks do not have a very well developed secondary market or a well method of take out financing. Therefore banks have to put repayment upfront and when developer aggressively bid on it the viability of the project itself gets into question.
However, these matters have all been flagged and flagged to the respective authorities, ministries and departments. So, to that extent, I am sure something will be worked out subsequently.
Some private players are also planning to stay away from road projects.
Yes. The basic thing is that when there is one good project and it is a success, bidders become more aggressive for subsequent projects. With one good project, things might have fallen into place, but that does not mean every project will go as well. Every project needs to be considered on its own merit and the bidding has to occur based on the reality of that project. If that does not happen and bidding becomes too aggressive, leading to issues in financial closure.
To what extent will Infrastructure debt Fund (IDF) work in the present scenario?
IDF is very essential. It is very much required because as I already mentioned about ALM issues affect the banks and banks cannot allow that kind of period required for proper smooth repayment of infrastructure projects. Therefore, IDF is very much necessary. IDF may not only be able to take out these finances from the banks thereby it is a win-win situation for everybody. Banks will again have resources to lend to cut the pressure.
Secondly, promoters will be able to access longer tenure funds at lower rates. For IDF they will be able to source in those investors who are comfortable with a long term fund such as insurance pension sectors and all such sectors will be able to root in. So for the investors, borrower, banks and for every single stakeholder in the business, this is something that is very much required and we will have to do something in order to promote this.
Do you agree that the global economic downturn has affected infrastructure sector?
Infrastructure is definitely affected by the global scenario because whether global or domestic, many of the private players in infrastructure space also have other businesses. Now when those businesses do well the cash flows can come in as equity in infrastructure projects. If those businesses get strained on account of lack of demand and lack of liquidity then automatically the rest of the space will also start getting strained. So they may be global or Indian developments. In either space infrastructure is affected in a direct way or a roundabout way. Another direct impact is the depreciation of rupee. With the depreciation of rupee the cost of imported component goes away. So again the cost of project rises creating a strain in the project.
At the same time since restructuring loans is almost a norm these days, what is your experience in India and will this help projects?
Repayment has to happen out of cash flow of those assets. Cash flow of the assets in initial stages might not be as much as it is projected. For instance, in a road project, the traffic takes time to build up. The cash flows become better towards the later end rather than towards the front end and as a result, there is a lot of stress in the front end which is the reason many of these things have to be restructured so as to ensure that payments get a longer tenure to be fulfilled.
In most of these projects, the asset is good and it is going to definitely have cash flows but they may not happen at the rate at which you have predicted. Therefore there is a need to extend the tenure to give them to ensure that the cost overrun can also be repaid and the lack of cash flows coming in the initial phases can also be built up. Over a period of time, you have to understand that restructuring is only done where viability is not a question. It is not done where we feel that the project itself is not viable. It is done only when you are sure that viability exists given a longer tenure that this repayment will definitely come through.
How do you assess State Electricity Board (SEB) restructuring? Will it be able to bring in actual reform in the sector?
SEB restructuring is absolutely voluntary. We have always found that the country does very well when it is pushed to a corner. At this time SEBs are also in a corner. I think if restructuring goes through and the credit profile improves them immediately the whole power scenario will look much better. Having said that it is also dependent on the performance of the SEBs that how much they can actually increase tariffs, realise tariffs and reduce losses. Reduction of losses is very important. There is a huge distribution loss that needs to be stopped. Unless we stop that you will not be able to bring back health to the sector. I think the government is taking absolutely the right steps and I think all the players down the lone whether it is central or state they are all on board because we have seen the amount of tariff hikes that have taken place across the board in all states.
Will banking sector also get benefit with this restructuring?
Yes, bonds will be moved from the loan book to investment book. On account of the fact that there will be state and central government getting into it, banks will be better off. At a later stage if we ensure that some kind of depth comes into the market then we can see whether banks can get it off the books also and release pace for further funding of the power sector. Some banks are almost at the top of their exposure levels and unless they can get some of the exposure of their books they will not be able to take fresh exposure.
What are the issues that banks are facing today since the Indian secondary market is yet to take off?
In the Indian context, the whole amount needs to be shown as repaid within the period of time that you can give, which is the banks can do. So the concept of take out financing, corporate bond, depth in bond market and a good secondary market for bonds are yet to develop. Thus, we are putting payments front ended therefore we have this process in the system. We need to find out ways and means of stretching the tenure; once we are able to do that, much of the strains will stop.
Besides, the overall economy as well as global scenario is strained; both are happening at the same time. People have been investing with the idea that the GDP was going to grow at 8 per cent or even more. Instead we are looking at a scenario where it is coming down to 5.5 per cent, a 2.5 per cent fall in GDP which means a fall in demand equally. We are also learning these things so that stress does not come up. Even today there is no dearth of financing if project is good and promoters are capable. Even today it is possible because we have learnt now to look at the areas we need to focus to ensure that these things are in order and does not land up in any stress subsequently.
How do you find the promotersÂ’ sentiments? Are they ready for new projects?
Because of many issues that had come up and there was a bit of uncertainty on policies at that point of time promoters were hesitating. But I think in the last few months the sentiments have been becoming better, at least there are signs of improving the sentiments.
Are banks ready to finance new projects?
Yes, but promoters should have good projects and capability. Developers also should declare us its revenue model from where the capital and liquidity will come. If all these three things are in place, then I donÂ’t think funding new project would be a problem for us. After all, banks also need to lend in order to make money. Banks are in business and will continue to do business as long as good people coming with good projects.
What is the single post-investment risk that bankers face?
The post-investment risk is essentially the market risk. It is the demand and assessing the demand by the time the project ends. For example, starting the project with a GDP of 8.5 per cent and ending it when the GDP is at 5.5 per cent poses a big risk. You have to do some kind of visualising and projections for the long gestation infrastructure projects in order to understand what will be the demand. If there is no demand, your pricing power goes down. I think it is this projection and what the demand and economy will be like at the end of that term that is the biggest post investment condition.
Is that a big challenge from a bankerÂ’s perspective?
I do not really think so. Given a little longer tenure, it will all come through. We have to understand that there might be a dip now but as Finance Minister had said that GDP has to be 8 per cent not only next year but a few years after that. So very clearly the pressure of demography is huge. We have so many people joining the work force up to 15 million people join work force. If that is the case, we should have that infrastructure in place to take care of this. There will be ups and downs, but having said that because we have young population growing up and coming into workforce and productive life cycle, I donÂ’t think in the medium term there will be any problem.
Do you think PPP is a successful model for Indian infrastructure sector?
Yes. Asian Development Bank (ADB) has commÂended the PPP model. They feel that on PPP India has done a good job the way they are bringing up the projects and the way the agreements are taking place. ADB says that as far as the number of PPP projects is concerned, we are almost as good as developed economies like Japan and South Korea.
Can infrastructure be called stable?
I will not say it is low risk at this point of time. The demand for infrastructure in India on account of demoÂgraphic challenge is going to be there. Since demand is there we were considering that this is of low risk.
What is SBI CapÂ’s plan for next fiscal?
We provide advisory services to our clients who are already in this sector and will continue to do it. Thus, we are putting a panel of specialists who have already worked in very high positions in these sectors. The proposal is that we do flag to them so they can give their inputs to give us a better understanding of the risks that may be involved. In this way we are improving our standards of appraisal.
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