Since 2011, infrastructure sectors have been struggling to secure funds, both debt and equity. In a major departure, while arranging equity has become even more difficult, financing of debt has eased to some extent in a few sectors. The road sector, for instance, was a silver lining. The majority of the hybrid annuity model (HAM)-based projects achieved closure. Meanwhile, the long-awaited Navi Mumbai and Mopa airports achieved financial closures, a financial coup for the airport sector. Nonetheless, the power sector was bereft of attention from the lenders. This is on account of factors such as poor financial health of discoms, mounting stressed assets, high level of corporate debt, difficulties in getting approvals, among others.
Road projects able to tie up funds
Reluctance on the part of financial institutions to extend lending to the road sector comes on account of the increasing number of non-performing assets (NPAs), resulting from high debt levels, weak traffic and slow pace of project execution by the players involved. While there has been an improvement with regard to financial closures for HAM projects, banks are still cautious in lending to engineering, procurement and construction contractors. Further, public sector banks have not been too keen to invest in HAM projects.
During 2018-19 (till March 10, 2019), Dilip Buildcon Limited and Ashoka Buildcon Limited achieved financial closures for eight projects worth Rs 89.49 billion and five projects worth Rs 55.39 billion respectively. Further, KNR Constructions Limited was successful in tying up funds for four of its road projects worth Rs 44.67 billion. In addition, three projects each of IRB Infrastructure Developers Limited, PNC Infratech Limited and Sadbhav Infrastructure Project Limited, and one project of MEP Infrastructure Developers Limited also achieved financial closure.
With the lenders gradually warming up to HAM, there has been a pickup in financial closures. As per India Infrastructure Research, a total of 27 projects achieved financial closure in 2018-19 (till March 10, 2019), as against 10 in 2017-18. All these projects are being implemented through HAM. In comparison, six of the 10 road projects which achieved financial closure in 2017-18 were being implemented through HAM, while the remaining four were design-build-finance-operate-transfer projects.
While financial closures have not been too difficult to come by, lenders (based on their experience with lending to the sector) are still somewhat reluctant to fund these projects. One reason for this is the reduced equity requirement for HAM projects which raises doubts regarding the promoter’s credibility in terms of meeting debt obligations in the future. Projects are being financed at a debt-equity ratio of 80:20, resulting in an equity requirement to the tune of about 10-15 per cent of the project cost. Given the relatively asset-light nature of this model, several first-time promoters or companies with weak balance sheets and financials had bid for, and secured, high-ticket HAM projects. Their order books have swollen to four times their revenues, raising concerns of timely project execution, which is why banks are reluctant to loan them money.
Currently, 11 public sector banks, accounting for 18-20 per cent of total banking credit, have been put under the Reserve Bank of India’s Prompt Corrective Action framework, which prohibits them from lending to risky segments, including under-construction road projects. Also, given the fact that lenders have limited resources at hand, they are expected to be very choosy in lending to developers. With a huge chunk of projects being rolled out through the same mode of implementation within a short span of time, banks would eventually find it difficult to fund all the HAM projects. As per industry experts, it might take longer than expected for financial closures to be achieved, thus pushing closure of these projects to 2019-20.
Diffidence towards power and renewable energy sectors
In the infrastructure boom period (2007-12), many power projects achieved financial closures. However, policy paralysis, non-availability of regular fuel supply arrangements, lack of power purchase agreements (PPAs), etc., left a sizeable number of projects stranded. The reluctance on the part of lenders continues even today with most of them sitting on sour loans.
While a number of renewable energy projects are getting commissioned, banks and financial institutions have taken a step back in funding these projects. Lenders are particularly deterred by the uncertainties in the renewable energy sector, and there is general apprehension around lending to the power sector as a whole.
Falling solar power tariffs have become a major point of contention in the solar industry. The Ministry of New and Renewable Energy also recently capped solar tariffs at Rs 2.50 per unit, a move criticised by solar power developers on the premise that capping of tariffs, especially in the face of currency risks and safeguard duty, could affect project viability in the long term and thus create NPAs in the sector.
The wind segment too is facing the heat due to renegotiation of PPAs, lack of open access for interstate transmission and delayed payments by discoms, all of which are leading to financial concerns and raising bankability issues. Given these concerns, lenders are treading cautiously, leading to delays in financial closures.
Financial closure of airport projects a remarkable feat
The civil aviation sector achieved a major milestone with the tie-up of funds for two long-delayed airport projects – the Mopa international airport and Navi Mumbai international airport, Phase I. In July 2017, GMR Infrastructure concluded fund-raising for Mopa airport, which will be developed at an estimated cost of Rs 19 billion with a debt-equity ratio of 70:30. A year later, in July 2018, GVK Power and Infrastructure Limited achieved financial closure for Phase I of Navi Mumbai airport. Lauded as one of the big investments in the country’s aviation sector, the airport is likely to be developed at an estimated cost of about Rs 160 billion.
Projects with good economics and strong promoter backing have been able to secure funding. That said, a lot more still needs to be done to attract financiers, who are in a wait-and- watch mode, for funding a huge chunk of projects. Banks, especially public sector banks, are already NPA-laden which has resulted in their being averse to infrastructure lending. The Insolvency and Bankruptcy Code (IBC) is a step in the right direction to clean up the stressed assets mess. While there have been some hits and misses, on the whole, the IBC has been a positive for the country.
Much has been said about the lingering issues in infrastructure sectors, and although the government has done its bit by easing the policy environment, not enough is happening on the ground. While commercial banks continue to remain the mainstay for infrastructure financing, there is a long road ahead for financial closures to reach pre-2011 levels. Besides, interest has shifted towards revenue-generating operational assets.