Climbing interest rates and scarce capital have turned the mood in the infrastructure industry sour. But the Union Budget of February 28 could turn this mood around if it encourages the government speed up the awarding of key projects.
As of now, the odds are stacked heavily against the sector. Infra companies are waiting to hear the government's vision for the sector from Finance Minister Pranab Mukherjee. The ruling parties have historically used the occasion as much to signal their policy directions as to make an income and expenditure statement.
There has not been much action in the sector lately. GMR Group's Chief Financial Officer A Subba Rao minces no words when calling the government inactive on infrastructure. The government, he suggests, must identify projects in airports, seaports, highways etc and take steps to award these projects under the public-private partnership (PPP) mode. According to him, the government must introduce incentives in contracts that will encourage better management of public assets by the winning bidder.
Many airports are waiting for a face lift. "It is not enough if an airport such as Chennai and Kolkata are expanded, but they needed to be maintained,'' says Rao. He insists the government awards Chennai and Kolkata airports to the private sector in the same way it did Mumbai, Delhi, Bangalore and Hyderabad. As for the power sector, he says, delay in land acquisitions is holding up capacity additions.
On developing expressways, senior officials in the highways ministry are of the view that citizens can hope to see the addition of 20 km length a day only if the pace at which projects are awarded picks up substantially. The country could see 20 km of four-lane highways being added each day after two years only if 15,000 km length of projects is awarded and under implementation. As of now, there is only about 3,000 km length of projects under implementation. In the nine-month period from April 2010, the length added was only 3.9 km a day. The new minister, CPJoshi, has said his priority is quality and safety of the highways being built, rather than the length.
According to Chander S Bansal, director & CEO of the Hyderabad-based infrastructure firm Rithwik Projects, the performance on the roads depends on how much financing is going to be available with banks for the sector. "Banks typically allocate a share of funds available with them for roads, and we have to see if that goes up or comes down this year. The number of projects awarded has to be proportionately matched by debts. If NHAI awards a large number of projects in one year, that does not mean all of them can achieve financial closure because of the sectoral lending caps that banks have. Projects require 70 percent of costs by way of debts. But, on the other hand, the pace of project execution will get hastened only if more projects are awarded every year.''
At present, long term financing is not available to the infrastructure sector. "We need to salute the banks: they have continued to support the infrastructure sector though their sources are not long term," says Rao.
The companies, nevertheless, stand to gain from what the Finance Minister did last year: extending additional tax sops to individual taxpayers who invest in infrastructure bonds. L&T and IDFC have had successful issues because of this.