2014 Outlook: Infrastructure And Project Finance

As of the 2014 outlook for Infrastructure and Project Finance, rating agency Ind-Ra expects the establishment of a roads regulator which was announced in Union Budget 2013-2014, only post elections. Risk emanates from the fact that the setting up of a regulator which is already delayed could take more time post the conclusion of the forthcoming general elections. The Finance Ministry has raised questions about the structure of the proposed regulatory body. These include whether the proposed regulator should play a dual role of quasi-judicial as well as advisory functions. On the back of numerous challenges facing the sector, Ind-Ra believes that more than the actual set up of the regulator, determining the contours of a regulatory mechanism will be challenging.

Rescheduling or delaying premiums has been grabbing most of the news headlines primarily due to big-ticket names and the quantum of money involved. On 5 March 2014, the Finance Ministry, in line with the recommendations of Rangarajan Committee, decided to reschedule the premiums of over 30 projects. However, this may not necessarily provide substantial relief to these projects. If existing contracts are terminated or re-bidding is to happen, it may not be able to attract attractive premiums like before due to the current slowdown. In fact, in sharp contrast, some projects could require viability gap funding from the government. Continuing with projects in the present form would not be a feasible alternative.

Ind-Ra expects more realistic highway project bids in the near future. This is because the Highways Ministry has stipulated that, at any point, a developer should not be allowed to bid for further projects if financial closure for at least three of its projects is pending. This came on back of the aggressive and more often unrealistic bidding which had become more frequent at one point in time. Although a few developers have monetised their assets to reduce the current stress on project cash flows, the returns have been below expectations. The strained financial capability of project sponsors cannot be over emphasised at this juncture.

In terms of mitigating revenue risk, national highway projects have an edge over state highway projects since partial tolling is allowed. This is when at least 75% construction is complete and the balance is stuck due to reasons not attributable to concessionaire. In such a case, the concessionaire is permitted to commence tolling on the completed stretch. The measure has a positive impact on those projects where any inordinate delay does not hamper implementation schedule.

The Supreme Court’s decision to delink forest clearance from environment clearance is likely to benefit highway projects which are stuck due to pending environment clearances. The order is likely to provide the much-needed impetus to various projects which were stuck due to the linking of these two clearances.

MORTH (Ministry Of Road Transport & Highways) is likely to deploy an Electronic Toll Collection system (ETC) for national highway projects on an all-India basis. The system will drastically increase convenience levels with a near non-stop toll collection and create a leak-proof tolling management system for developers. The ETC system would address worsening traffic congestion at various toll plazas and also pave the way for maintaining a central electronic database for potential traffic studies. Though this is a welcome measure for the sector, Ind-Ra believes that it would work well only for motorists who use highways almost every day.

The impact of the proposed measures on the credit profile of project companies would be clear once they take full shape. Developers are either not investing in or exiting highways projects citing the government’s inability to provide the required clearances in time and thereby making the projects unviable. Following the completion of the upcoming Parliamentary elections, the sector is likely to gain renewed attention from policy makers. At the moment, investments in the infrastructure sector are viewed as risky. While implementing bodies and developers are looking at a course correction, the road to recovery seems some distance away.