News
Wednesday, December 26, 2012
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1. Slowdown and after: The investment climate has to significantly improve
to attract private players
2. 92% of highway projects yet to find takers in FY13
3. Infrastructure companies set to launch tax-free bond issues
4. ‘India is self-sufficient’
5. India, China key to growth as world stares at fiscal cliff
6. South India accounts for a lion's share of PPP models in India
7. NBFCs partner India's growth story
8. Road sector continues to face multiple challenges: ICRA
9. HCC-Coastal Projects venture bags railway contract
10. 100% FDI gets green light for rly line projects
11. Realty sector hit by debt, inventory pile-up
12. Railways expect Rs 3,800-cr investment
13. Rs 4.8 lakh cr worth projects to wrap up this fiscal: CMIE
14. 7 infra majors in fray for cargo berths at Chidambaranar Port
Slowdown and after: The investment climate has to significantly
improve to attract private players
Financial Express
December 26, 2012
Over the years, India has made significant progress in physical infrastructure
segments like electricity, railways, roads, ports, airports, irrigation, urban-rural
water supply and sanitation. Still, India ranks only 84th in basic infrastructure as per
the Global Competitiveness Index 2012-13 of the World Economic Forum.
India faces significant challenges of inadequate investments and the absence of a
promising environment for better private participation in the infrastructure space.
This has also resulted in the slowdown in India’s GDP growth rate. Yet, India’s
growing economy holds huge potential for critical infrastructure development
consisting of transportation, power and telecommunication. There remains a need to
stimulate investments through policy and structural reforms.
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Major highlights of the infrastructure sector
Growth in the core infrastructure industries decelerated to 4.4% in FY12 after
growing at a rate of 6.6% in FY10 and FY11.
Sectoral deployment of bank credit to the infrastructure sector during FY13 (Apr-Oct
12) stood at R202.6 bn. On a year-on-year basis, this represents a growth of around
15%.
Envisaged total fixed investment by large firms in new projects which were
sanctioned financial assistance during FY12 dropped by 46% to about R2.1 tn from
R3.9 tn a year ago.
The development of the infrastructure sector has been a top priority of the Indian
government for the past couple of years. The government has been investing heavily
in this sector and devising conducive policies to encourage private participation.
However, it is evident that the current level of investment is not sufficient to meet
the demand. The projected investment in infrastructure has been increased from
R19,481 bn in the Eleventh Five-Year Plan to R40,152 bn in the Twelfth Five-Year
Plan in order to bridge the demand-supply gap.
The government is seeking to increase its investment in infrastructure through a
combination of public investment and public private partnerships. Several measures
have been announced recently in this context. The government, in the middle of the
current financial year, promised to boost the country’s infrastructure and pledged
quick action in awarding airports, highways and port projects. Other significant steps
announced in 2012 include easing of external commercial borrowing norms for
infrastructure companies, encouraging foreign institutional investors, qualified
foreign investors and other foreign investment in infrastructure bonds and other
securities. These measures could provide the necessary impetus to the sector. The
government had also set up an infrastructure debt fund through public-private
partnership to address the long-term funding problems of the sector.
Further, the government has recently got a bill allowing 51% FDI in multi-brand
retail passed in Parliament, thus, paved the way for international multi-brand
retailers to come in. Opening up the retail sector has been under consideration for
more than a decade. This regulation includes a clause for the multi-brand FDI
retailers to invest 50% of their total investment to develop India’s back-end
infrastructure such as cold storage, warehouses, etc. This is expected to develop
India’s overall food supply chain where private investment is minimal.
Power
Investment in the power sector has been affected by the rising losses of public sector
utilities. Though power tariffs have been raised by many state electricity boards
(SEBs) along with several other steps initiated to improve the financial health of the
SEBs over the last two years, the rising fuel cost and operating expenses have
pressured their financial performance during FY12 and the first half of FY13. Though
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the government has approved a a debt restructuring plan for the SEBs, its
implementation is being delayed. The reform is expected to mitigate the financial
losses of SEBs and enhance the power distribution system.
The exposure of banks to the power sector is about R3.3 trillion as per sector-wise
deployment of credit obtained from 47 scheduled commercial banks that account for
95% of total non-food credit. However, with the government planning to invest
around R15,000 billion during the 12th Plan as compared to R8,021 bn during the
Eleventh Plan and with more private participation, the power sector is expected to
achieve a double-digit growth in the next five years.
Railways
The growth target for the overall infrastructure development in the Indian Railways
has not been matched with demand, as many projects have been running behind
schedule, leading to time and cost overruns of more than 100%. Only around 1,800
km of new lines were added from 2006 to 2011; compare this with China, which
added around 14,500 km. Some of the issues affecting the sector include lack of
funds, mismatch in investment priorities, lack of timely reforms in organisations and
inability to attract private investments. Moreover, the loss-making Indian Railways
lack adequate funds to support its investments.
However, the ministry of railways has proposed to increase the freight rates and
passenger fares to revamp its revenue inflows. Moreover six high speed rail corridors
have been proposed, wi-fi in trains, converting the remaining meter gauge to broad
gauge railway tracks, modernisation of nearly 19,000 km track through renewal,
strengthening of 11,250 bridges to run heavier freight trains of 25 tonne axle load
and to achieve passenger train speed of 160 kmph have been proposed by the
government during the next five years with an investment of R632 bn.
Ports
India has around 13 major ports which handled around 560.15 mn tonnes of cargo
during FY12 as compared to 423.56 mn tonnes during FY06. Moreover, these ports
along with more than 55 operational non-major ports handled more than 90% of
India’s external trade by volume. However, there are many issues faced by ports,
including the long custom procedures, unavailability of proper infrastructure to
handle large cargo, receiving proper clearance on time, insufficient connectivity, etc.
Looking at these irregularities, the ministry of shipping had undertaken 25 major
projects under the public-private partnership route to be allocated during FY13.
The government also proposed to invest around R1,200 bn in more than 400
projects in major ports and R1,600 bn in non-major ports of which more than three
fourth is to be allotted to the private sector by the end of 2020.
Roads
Importance of the road infrastructure in economic growth needs no reiteration, since
more than three-fourths of passenger traffic and more than half of the freight moves
by roads in India. The total road network constitutes around 3.34m km of which the
National Highways constitute a mere 2%, state highways around 3.9% and the rest is
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with major districts roads, rural roads as well as urban roads. Yet only 24% of the
country’s national highways are four-lane and meet the required standards. Traffic
on roads is growing by 7-10% every year, while the vehicle population is growing at
12%. The government had undertaken and implemented many projects under
various schemes to develop India’s road infrastructure, including Jawaharlal Nehru
National Urban Renewal Mission (JNNURM), National Highway Development
Programme (NHDP), etc.
However, during FY12 there has been a shortfall of around 50% in the government’s
target of completing 20 km of road construction per day. Reasons attributed for this
shortfall include financial, regulatory, execution, project planning, proper policy
implementation, etc. Some of these issues need to be resolved immediately, while the
others require long-term action. The government has planned to cover a length of
around 8,800 km under the NHDP project by the end of FY13 with an investment of
around R255 bn. It had further planned to set up infrastructure targets for various
sectors, putting in place an institutional mechanism to monitor the progress of each
road based projects at the central and state levels.
The way forward
The recovery process of the Indian economy since the financial crisis of 2008, as
reflected in the performance of FY11, is again taking a pause in FY12 owing to global
uncertainties. However, given the huge demand for infrastructure development,
accelerating savings and investment rates hold a key to revitalizing the economy and
achieving the growth aspirations. Moreover, there is a huge investment target for the
infrastructure sector to be met during the 12th Plan period. The government has
been taking measures such as clearing some of the long standing infrastructure bills,
including the land acquisition bill, bringing transparency in the tendering process for
infrastructure projects, and enhancing the monitoring of projects with the use of
technology, etc. so as to achieve the 12th Plan target. It further plans to enhance
private investment in the infrastructure sector up to 50% by the end of the Plan
period. This needs to be supported by taking conducive policy measures, enhancing
the tendering process at every stage, and adopting pending reforms so as to create a
favourable environment for private investment in the infrastructure space.
Going forward, India can regain its near to double-digit growth trajectory only if
infrastructure development is taken as a priority, supported by an efficient system
for clearing infrastructure projects of all sizes across sectors.
The author is leader–Economy Analysis Group, Dun & Bradstreet India
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92% of highway projects yet to find takers in FY13
Times of India,
December 26, 2012
The infra growth story appears to be over, at least as far as roads are concerned, with
the private sector now shunning government's road projects. After announcing an
ambitious spending target of $1 trillion for infrastructure, the government has failed
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to find any takers for 8000 km of road projects to be awarded under the build,
operate and transfer (BOT) mechanism this fiscal.
Interestingly, the National Highways Authority of India (NHAI), the nodal agency for
awarding these projects, was successful in awarding over 8,000 km of road contracts
last year with companies bagging 31 of the 51 projects at a premium. Based on last
year's success, the government increased the award target to 8,800 km this year.
However, NHAI so far has been able to award only 700 km with a little over three
months remaining in the current fiscal.
Two projects worth about Rs 2,450 crore awarded last year to DSC and GannonDunkerley were terminated after failure to achieve financial closure (the process
through which companies tie up debt). This was the first time that such termination
was done.
At the current pace of less than 5 km of road construction per day, the government is
way behind its ambitious target of achieving 20 km of road construction daily, for
which it needs to award over 7,000 km of projects each year. The reason: As many as
50 road projects worth Rs 50,000 crore for a total 5,000 km are on the block in the
secondary market. They have been put on sale by debt-laden infrastructure
companies that had bagged the projects through aggressive bidding earlier but now
want to get rid of them after finding it difficult to execute the projects due to
depressed returns.
Prime Minister Manmohan Singh recently reviewed the performance of the transport
sector in a series of meetings. A PMO statement issued last week on targets for
awarding road transport and highways project said, "The ministry will try its best to
award road projects according to the original targets for FY 12-13 and will certainly
cross 8,000 km of awards this year by March, 2013. Road projects of at least 3,000km length will be awarded under operate, maintain and transfer (OMT) by March,
2013."
This means that in the absence of takers for road projects under BOT basis, which
requires companies to raise funds from the market, the government is planning to
award 3000 km of road projects on engineering, procurement and contract (EPC)
basis, where government spends the entire money required to build roads.
However, a government statement last week said, "As against the target for awarding
works for a total length of 8,800 km during 2012-13, it has been possible to award
projects for a length of 705 km up to October, 2012. Some projects have not received
a good response from bidders. Apart from general slowdown of economy, viability of
some of the projects, sectoral lending caps of banks, limitations of the
concessionaires like availability of equity and other resources to execute the projects
appear to be the main factors for poor response."
Bajrang Choudhary, CEO, infrastructure project development, SREI Infra, told TOI,
"I have my doubts on the PMO statement. If they awarded just 700 km in the first
nine months, then how can they award 9,000 km in the next three months?
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Constraints like land acquisition and funding from banks remain the same. The
government first needs to address these issues before awarding further road
projects."
Leading infrastructure firms like L&T, GVK, GMR, IVRCL, Gammon Infrastructure,
SREI Infrastructure, Gayatri Projects, Madhucon Projects and Ashoka Buildcon,
among others, have reportedly put their road assets on the block.
"Most of the private sector infrastructure firms are themselves trying to find a buyer
for their road projects. How can you expect them to bid for new projects? They have
already bitten off more than they can chew," said an industry analyst.
Explaining the situation during an earnings call last month, IVRCL chairman E
Sudhir Reddy said. "RBI, banks and the NHAI, for instance, have their own way of
interpreting the language. In fact, it is a larger problem that has to be addressed by
the government. It's not IVRCL alone. The problem bothers all other infrastructure
companies too. That is precisely why we have excused ourselves by not bidding for
any further projects."
Echoing similar feelings, a Lanco spokesman said, "We are being cautious at the
moment as some of the bids in the past by some companies have been aggressive and
it's become challenging to achieve financial closures. We will bid, provided some of
the issues related to Right of Way and achieving financial closures are addressed."
Infra firms, meanwhile, are being chased by their lenders to sell assets any which
way they can as banks have stopped lending to the road sector, or are offering loans
with stringent lending norms. This has scared away private developers from
investing in highway projects. Over three dozen such projects are awaiting financial
closures.
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Infrastructure companies set to launch tax-free bond issues
Business Standard,
December 26, 2012
The January-February-March period (popularly the JFM months) is set a witness a
series of offers from infrastructure companies, rushing in to get the most out of the
Rs 50,000-crore fund raising opportunity they have this fiscal.
A number of tax-free bond issues are slated to hit the stands in the coming three
months. According to the government, ten infrastructure or infrastructure finance
companies, which include India Infrastructure Finance Co (IIFCL), National
Highways Authority of India (NHAI), Housing and Urban Development Corp
(Hudco), Power Finance Corp (PFC) and IRFC, have together been allowed to raise
Rs 60,000 crore from the public during 2012-13. Of this, so far not more than Rs
10,000 crore has been raised through a handful of issues, a part of which was done
through the private placement route.
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The January-February-March period (popularly the JFM months) is set a witness a
series of offers from infrastructure companies, rushing in to get the most out of the
Rs 50,000-crore fund raising opportunity they have this fiscal. The offer from IIFCL
is set to open on December 26 and close on January 11, while the Hudco offer will
open on January 9. IIFCL can raise up to Rs 9,215 crore through this offering, while
Hudco can mobilise up to Rs 5,000 crore. Two offers, one each from REC and PFC,
closed earlier this month.
Tax-free infrastructure bonds were proposed by the government to channelize retail
and institutional savings into the infra sector of the country through long-term
bonds. To make these bonds attractive and widen the investor base, government has
allowed full tax exemptions to interest income from these bonds. To make these
instruments even more attractive to retail investors, for example, IIFCL is now
offering an extra 50 basis points (half a percentage points) for those investors, who
are applying for bonds worth less than Rs 10 lakhs. Most of these bonds are also
coming with high credit ratings, indicating low risks involved in these instruments.
These bonds do not allow any tax rebates to investors, but the interest income from
these instruments is tax exempt. Market analysts and investment advisors believe
that during the JFM period more such offers would hit the street, giving investors the
option to invest in an instrument which is relative new but has several advantages.
"These bonds come with safety and consistency of return," said Hemant Rustagi,
CEO, Wiseinvest Advisors, a financial planning outfit. "All these bonds are from
government-run companies, have the highest or very high credit ratings, and are also
listed and frequently traded. So the common and the biggest fear among retail
investors, that of losing your money, is taken care of."
Tax-free returns from these bonds, when calculated on a pre-tax basis for
comparison with other interest-paying instruments, score better. What retail
investors in IIFCL offer can get is equivalent to rate of of around 11.5% on a pre-tax
basis.
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‘India is self-sufficient’
The Economic Times,
December 25, 2012
The Japanese Ambassador to India, Takeshi Yagi, is full of hopes about the ties
between the two countries and its future.
He took over as the Ambassador in October this year. Yagi, who is relatively new to
the country, says that India has done well for itself and is not dependant on any
country for anything.
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“We are working on various things together, the current projects are the ChennaiBangalore industrial corridor. This consists of many projects and is a master plan.
We will also assist in the construction of the second phase of the Bangalore Metro
project. Preliminary studies have begun for the high-speed train project between
Bangalore and Chennai and extended areas. We are trying to extend it to the west
and east coast of India,” explains Yagi.
He goes on to say that in the economic field, the number of Japanese companies
operating in India has increased rapidly over the past few years, making Japan the
fourth largest foreign investor in India.
“As part of our economic cooperation, we are actively participating in important
infrastructure projects. In the educational sphere also, we want to invite more Indian
students to Japan instead of expanding our universities here,” says Yagi.
“If more students come to Japan, the tourism sector will be boosted. As of now, the
number of tourists from India to Japan is very limited. Most of them feel that Japan
is an expensive country and some of them also have language constraints. But if they
do decide to come to Japan for a holiday, I am sure they will not return disappointed.
They will be assisted so that their stay is comfortable,” he says.
“But here, I would like to clarify that Japan is not very expensive and we will
welcome tourists from India to our country. As far as Japanese investors are
concerned, the Indian government doesn’t have to do much to lure them as they are
already on a rise. Both the governments can cooperate to bring in more investors.
The Indian infrastructure is expanding rapidly and India is not dependent on Japan
for its infrastructure. It is self-sufficient, in fact, many countries are attracted to
India because of its natural resources,” he notes.
“Since this year, we are celebrating the 60th year of Indo-Japan diplomatic ties, we
are organising more than 160 cultural and intellectual exchange events. This will
include introduction of Japanese technology and conducting a host of cultural
programmes in various parts of the India. These exchanges will help Indians to know
their country better and in creating awareness about our country and its culture,” he
sums up.
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India, China key to growth as world stares at fiscal cliff
PTI,
December 25, 2012
India and China will be the keys for the global economy to grow by even a modest 3
per cent in 2013, after bouts of debt turmoils across continents pushed it to fiscal
precipice and an anaemic growth rate in 2012 left policymakers and politicians at
crossroads.
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Coined by the influential US Federal Reserve chief Ben Bernanke, 'fiscal cliff' —
better described as a combination of spending cuts and tax hikes — seems to be the
lingo for the problem-ridden world economy in the New Year.
If emerging markets such as India and China grappled with spiralling inflation and
risks of asset bubbles, the US and Europe remained almost stagnant despite record
low interest rates in 2012.
Adding to the economic gloom, the 17-nation euro zone, a grouping of nations that
share the common currency euro, continued to be bogged down by debt crisis which
also took roots in Italy and Spain while suffocating Greece.
Though slow revival is happening in some emerging economies and developed
nations, as the International Monetary Fund (IMF) recently said, “The outlook for
growth remains weak with appreciable downside risks.”
Going by IMF projections, the world economy is likely to expand 3.3 per cent this
year, way lower than 3.8 per cent growth seen in 2012. The other projections call for
a growth rate of 2-3 per cent for the global economy in 2013.
To start from Europe, the epicentre of debt crisis, the economic situation is jittery
and the eurozone has again slipped into recession — generally referred to as two
straight quarters of negative growth. Hundreds of billions of dollars worth bailout
money has been absorbed by ailing Greece but the debt turmoil has only spread to
other European nations, even pulling down some governments.
While excessive risk taking ways triggered the 2008 financial collapse in the US, now
it is austerity as well as lack of strong united actions among European nations that is
roiling the world economy.
For instance, the euro area economy shrunk by 0.1 per cent in the 2012 September
quarter, following a contraction of 0.2 per cent in the previous three months.
Moving away from the sick Europe, emerging markets such as India and China too
are reeling under slowdown pangs. However, compared to many of the ailing
developed economies, these nations are the remaining bright spots in the dark
economic firmament.
However, expectations are high for China to return to 8 per cent and India to over 6
per cent growth in 2013, which in turn would help global economy to achieve a
modest growth.
As a corollary, jobless rate are as high as nearly 12 per cent in some European
countries while it is in high single digit in the US.
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South India accounts for a lion's share of PPP models in India
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TNN,
December 26, 2012
Of more than 800 projects being implemented under Public Private Partnership
(PPP) model in India, South India accounts for a lion's share in terms of numbers as
well as the size of the projects. The quantum of investment from private sector in
total infrastructure projects of India is very low compared to many other countries.
Factors such as risk sharing between public and private institutions, bottlenecks in
land acquisitions, and regulatory issues are known to affect the private investment
environment in PPP model. All this was discussed at the tenth edition of 'Summit on
Sustainable PPPs in Infrastructure' organised by CII with the theme of 'Integrated
Infrastructure Development under PPP - Emerging Scenario in South India".
Many speakers suggested that governments and private partners should start
thinking of developing surrounding eco-system of the project, instead of just creating
an infrastructure. They should also focus on inclusive growth in PPP projects. If
planned properly, this will lead to overall growth across different geographies of the
country. Southern States have many common conditions and should learn from
other's experiences, said speakers. Aparna Bhatia, Director PPP Cell, Ministry of
Finance, Department of Economic Affairs, Governemnt of India, said, " Roads top
the list of PPP projects followed by tourism and urban development.
To define framework for PPP, Government of India identified challenges ranging
from regulatory issues to funding. Most of the road projects are being funded by
Viability Gap Funding scheme. Of the 12th plan infrastructure investment of Rs 41
lakh crores, government of India expects 50% of the investment from private sector.
Paritosh Gupta, Co-Chairman, Suminfra 2012 & Managing Director, IL&FS - IDC,
said, "India needs power, roads, telecom, and other urban infrastructure. Land
acquisition models in Gujarat and Rajasthan were very successful. Project
development involves seeing through the assets 5 years down the lane and working
backwards."
Principal Secretary - IDD, Government of Karnataka, Raj Kumar Khatri, said, "We
have 12 PPP cells in Karnataka today. Website on PPP framework is created. We
invite projects that are economically viable, environmental friendly, and address
social inclusiveness. Through various PPP initiatives, Karnataka is planning for
seamless connectivity between ports, roads, airports and railway trasportation.
Shailesh Pathak, President, Srei Infrastructure Finance Ltd, said, " Government
should create and identify existing infrastructure and should leave it to private sector
after creating to manage it in a better way. We should evaluate Economic Rate of
Return as well as Internal Rate of Return. PPP models stressed the balance sheets of
infra companies. Companies who were bidding 10 years back do not have that much
money and courage to bid today. Lending institutions should take into account, the
value appreciation while evaluating the projects."
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NBFCs partner India's growth story
The Economic Times,
December 25, 2012
One of the lasting contributions of the 2007-08 financial crisis will be the poetic
phrase 'shadow banking'. Aptly, shadows are determined by the size of the
obstruction, which, in this case, may have been the long-held article of faith called
depositor protection, on which the elaborate edifice of regulation was built.
Fortunately, for India, "the whole alphabet soup of levered up non-bank investment
conduits, vehicles, and structures" (Paul McCulley, 2007) had barely begun to bubble
before the lessons from the global crisis were staring regulators and policymakers in
the face. The aftermath created the opportunity to set in place ground rules for a
future financial system that would avoid mistakes of the past; a necessity in the face
of a highgrowth economy and increased attention of global investors. The draft
guidelines, based on the Thorat Committee Report on NBFCs, is part of that
architecture.
In all fairness, the NBFC sector was not in regulatory shadows as RBI has, over the
years, tweaked and implemented a differentiated regulatory regime for
depositaccepting, systemically important, and other non-bank institutions. A few
famous failures of deposit-accepting institutions in the 1990s led to legal and
regulatory measures to curb and regulate the activities of looselyregulated
institutions that garnered substantial deposits from areas where banking could not,
and indeed would not, reach.
New generation private sector banks and newly-energised and technology-powered
public sector banks helped by filling in the gap and the situation was quickly
contained. Regulatory focus then shifted to the non-deposit accepting NBFCs and
attendant issues relating to classification, public funds and core investment
companies. Once the framework for such lenders was put in place with a bank-like
prudential and capital regime, it gave the market the confidence required for growth.
Indeed, the past two decades have witnessed the evolution of multiple types of
NBFCs and NBFCs can be said to have partnered the India growth story as
sanguinely as banks. From financing long-term infrastructure and running the
financial ecosystem around construction, leasing, equipment, real estate, secondhand machinery, vehicles and creation of small asset backed loans, NBFCs came to
be synonymous with local growth stories, often maintaining good capital adequacy,
asset quality and growth. So, why the need to look at something that seemed to be
doing just fine? For one thing, the problem of plenty had to be addressed.
In the nineties, with the new regulatory framework, the net was cast wide, leading to
registration of NBFCs with extremely basic capital and infrastructure (sometimes no
more than a paper folder and a rented registered address), probably motivated by the
typical Indian proclivity for cornering licences. The recommendations address this
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issue boldly; balancing delicately the existing legal framework based on net worth
and the proposed asset criteria. Definitions are modified, exemptions are created,
but with the end goal to deregister non-serious players.
Trading in licences is set to become outdated as rules on change in control become
strict, providing opportunity for due diligence to regulators. There are many
interesting recommendations around governance, including approval for CEO
remuneration for large NBFCs, adherence to listing conditions, improved disclosures
and greater responsibility of directors.
Overall, the guidelines seem to converge further towards banking regulation on the
important parameters of capital and liquidity, thereby mitigating potential concerns
around stability and systemic risk. The NPA classification is also set to converge to
banking after a transition time. Real estate and capital markets attract higher risk,
weight and disclosures. However, this creates some significant issues for the sector to
deal with. Access to bank finance has been cut over the past few years through
various measures on bank lending, assignment, securitisation and such.
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Road sector continues to face multiple challenges: ICRA
Business Standard,
December 26, 2012
ICRA Research has come out with its report on road sector. According to the
research firm, road sector in India continues to face multiple challenges in the form
of execution impediments, financing constraints, optimistic traffic estimates and
stressed financial position of the developers.
ICRA Research has come out with its report on road sector. According to the
research firm, road sector in India continues to face multiple challenges in the form
of execution impediments, financing constraints, optimistic traffic estimates and
stressed financial position of the developers.
Road sector in India continues to face multiple challenges in the form of execution
impediments, financing constraints, optimistic traffic estimates and stressed
financial position of the developers. Several projects have faced delays in execution
mainly on account of delayed land acquisition, removal of encroachments, shifting of
utilities, receipt of approvals and environment clearances, etc. In addition, the actual
traffic in many operational toll road projects has turned out to be significantly lower
than the traffic estimates. Consequently, lenders have increased caution while
funding fresh projects, especially in those cases where the bidding is perceived to be
very aggressive. In addition, overall creditworthiness of road developers have
deteriorated due to their leveraged balance sheet and strained profitability. Further,
weak capital markets and stressed valuations have made raising equity capital
extremely difficult for most developers. As a result, participation in the road projects
offered by National Highways Authority of India (NHAI) over the last few months
has been muted. While subdued competition is positive for the sector which was not
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too long ago witnessing irrational bidding, the sharp decline in the private sector
participation across the board implies reduced risk appetite of the developers and
increasing difficulty in facing financial closures.
Over the last few years, NHAI has been awarding projects only under the PublicPrivate Partnership (PPP) mode, in comparison to item-rate contracts which were
awarded earlier. The road contractors which were earlier engaged in executing
projects on item rate or Engineering, Procurement and Construction (EPC) contract
basis struggled to maintain their order-book and many opted to enter the PPP space
by undertaking projects on build-operate-transfer (BOT) mode. Since BOT projects
require long term fund infusion, and the capital markets have not been conducive for
raising funds, several players had resorted to external borrowings to meet their
equity commitments in various Special Purpose Vehicles (SPV) floated to develop the
projects thus resulting in double leveraging and increase in overall indebtedness at
the group level. Moreover, elongated working capital cycle in core construction
businesses of many entities has also strained their liquidity position and further
increased their dependence on borrowed funds. The operating margins of several
road contractors also witnessed pressure because of rising commodity prices (for
fixed-price contracts) and idling of capacities as execution could not begin on many
new projects.
Many projects which were awarded over the last one-two years faced difficulty in
achieving financial closure due to aggressive bidding, and uncertainty on land
acquisition, approvals etc. The lenders have also become cautious on groups which
have over leveraged themselves. Further, the execution on many of the projects
remained slow primarily because of delays in land acquisition, clearances, and
financial closure. Projects that had the requisite approvals and funding reported
healthy execution.
In case of many toll-based road projects which commenced operations, the actual
tolled traffic during initial period was significantly lower than the initially estimated
traffic. This coupled with higher interest burden had resulted in stress on debt
servicing capability and project return indicators. However, projects with established
traffic continued to perform well as the impact of higher interest burden was
compensated by higher revenues in case of inflation-linked toll rates.
With the pipeline of road projects to be awarded by NHAI and State Governments
remaining strong, there will be ample growth opportunities for both developers and
contractors over the next two-three years. As large investments are planned in this
sector, the participation of private sector will be indispensable, and Government is
likely to facilitate policies to attract higher interest. Some of the policies have already
been formulated like creation of Infrastructure Debt Funds and the role played by
India Infrastructure Finance Company Limited (IIFCL) which will assume greater
importance in channelizing the much needed long-term debt funds into this sector.
However, with multiple challenges confronting road developers, the industry is likely
to witness consolidation and stake sale in completed BOT projects are being actively
pursued by many promoters While the initial traffic observed in many of these
stretches is below the forecasted traffic, the long concession period of 25 to 30 years
News
provides headroom for improvement in cash flows due to potentially higher traffic
growth.
The report also highlights key findings based on study of 35 NHAI BOT road projects
(rated by ICRA) for project cost and time over-runs, actual traffic and toll collections,
and impact on debt servicing capability and returns indicators. The report analyses
extent of delays in project execution along with the reasons for such delays, post
completion performance analysis and key risks to lenders.
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HCC-Coastal Projects venture bags railway contract
Hindu Business Line
December 26, 2012
Infrastructure construction and development company Hindustan Construction
Company and its joint venture partner Coastal Projects Ltd have bagged a project of
the Northeast Frontier Railway to build a railway tunnel on a new railway line being
developed between Jiribam and Tupur in Imphal. This is the third order received by
HCC on the same railway line.
The latest tunnel is between Kaimai Road and Kambiron Road stations. The total
cost of the project is Rs 230.96 crore, with HCC’s share being 60 per cent. It is to be
completed in 28 months.
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100% FDI gets green light for rly line projects
Business Standard,
December 26, 2012
Foreign direct investment is set to flow into the building of “fixed railway
infrastructure” (read railway lines), ending a long-preserved policy of allowing only
Indian Railways to set up these facilities out of its internal accruals or budgetary and
other support.
Private investors, ports, export/import companies, “other investors”
now be allowed in the railway lines meant to connect ports, industrial
parks, and mines with other parts of the country. The railways will
these projects (construction and maintenance) on nomination basis
investor through competitive bidding. A revenue-sharing model has
worked out.
and FDI will
and logistical
either award
or select the
already been
The move is expected to give a boost to a sector where infrastructure expansion will
provide direct, tangible benefits to the economy. Currently, the PPP model in the
railway sector is at a takeoff stage, with large domestic investments coming in a few
areas or projects, including the Mumbai elevated rail corridor, private freight
terminals and a slice of the eastern segment of the dedicated freight corridor.
News
However, no FDI is allowed in these PPP projects and is limited to only manufacture
of components.
Under a new policy for participative models in rail connectivity and capacity
augmentation projects notified by the railway ministry, 100% FDI has been
permitted under the approval (FIPB) route “for the development of first- and lastmile connectivity projects at either end of the rail transportation chain providing
connectivity to ports, large mines, logistics parks”.
Under the policy, the railways will soon invite expression of interest from prospective
investors.
“It is applicable to any kind of goods traffic. These railway lines will be operated on
the ‘common carrier’ principle for public transportation of goods. The railway
connectivity will be developed on private land and it will be a non-government
railway project,” according to the policy.
Besides, funds for the project will be fully mobilised by the project proponent
without any participation by the railways. "The policy envisages financial
participation of the project proponent in the development and creation of rail
infrastructure for providing first- or last-mile connectivity under an agreement with
the ministry either on its own or as a joint venture with the infrastructure financing
and development institutions," said a railway ministry official.
Despite acute shortage of funds, railways have refrained from allowing FDI in their
core areas and allow it, through the automatic route, only in the manufacture of
components by private companies. Between 2000 and 2012, total FDI into the
railways was Rs 1,354.65 crore, according to the Department of Industrial Policy and
Promotion.
The new policy also allows state governments, local bodies, cooperative societies and
other corporate bodies, including the overseas corporate bodies, to invest in fixed rail
infrastructure projects.
“Land for the line will be acquired by the project developer to provide connectivity
with the main railway system. The railway land for providing connectivity may also
be made available on lease/licence under the extant policy. However, in such cases
commercial utilisation of the railway land for purposes other than for the project will
not be permissible,” said a senior railway board officer.
Under the model, the concessionaire would build lines and maintain them while the
railways will have joint and equal right to use the infrastructure to ferry goods.
Commercial activities related to freight handling and train operations at the terminal
will be conducted by the railways, and their cost will be borne by the nongovernment railway.
"We are expecting an encouraging response from the foreign and domestic players. It
was very necessary for the railways to open the doors for the private sector in core
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areas. It has been estimated by the Sam Pitroda committee on modernisation that
the railways need to invest Rs. 7,35,000 crore in the next five years to match the
growth rate of the Indian economy," the official added.
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Realty sector hit by debt, inventory pile-up
The Hindu Business Line,
December 26, 2012
Realty players say obtaining the 57-odd permissions to begin construction can take
as much as two years. During this time, the cost of acquisition or even just holding
the land for a project rises.
Ripudaman Singh, 29, is anxiously waiting for 2013. He has been planning to buy a
house or a shop for the last two years. But just as Singh would zero in on a property,
either the rates would have shot up or the project would have an exceptionally long
gestation period.
A disappointed Singh says he will buy a ready-to-move property at a premium, rather
than invest on projects with future deliveries.
Industry players, analysts and Government are hoping that 2013 will be better than
2012. With residential prices breaching all affordability limits in major metros,
offtake in real estate remained largely subdued in 2012. After being in near comatose
state, the industry says that the outlook for the next year will largely revolve around
economic improvement.
On the financial side, the major listed realty players have shown huge debts and
piling inventory. The transaction size was comparatively smaller this year despite
prices remaining stagnant, unlike in the previous two years when most of the cities
witnessed a steep price rise.
Listed players, such as DLF, were busy pruning their debts by selling non-core assets.
Others like Unitech, Sobha Developers, HDIL had fewer projects compared with
previous years.
In terms of projects, green was passé and sports replaced it when it came to master
planning. In 2012, projects based around golf, soccer, cricket and healthy lifestyle
became the new slogan.
Ravi Saund, COO, CHD Developers, said, “The global meltdown is only a small
contributor to this downward spiral graph. Severe monetary tightening by the
Reserve Bank of India, high inflation coupled with high interest rates adversely
impacted private consumption growth, industrial investments and business
sentiment.
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One big hitch that cash-strapped developers faced was in getting approvals. They say
that obtaining the 57-odd permissions to begin construction can take as much as two
years. During this time, the cost of acquisition or even just holding the land for a
project rises.
Hence, despite sitting on inventories, developers say it is impossible to bring the
rates down. A muted festival season saw fewer projects being launched, compared
with the previous years, despites offers.
Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield notes,
“…Given that most aspects of development such as construction cost, development
cost, time taken for approval and debt all have been on an upward tangent,
developers have not been able to lower cost.”
OUTLOOK FOR 2013
Residential: Anuj Puri, Chairman, Jones Lang LaSalle, says most Indian cities will
see an increase in residential launches in 2013. Bangalore and Chennai will witness a
decline in launches.
In commercial real estate, Mumbai, NCR-Delhi, Bangalore and Chennai saw 72.5 per
cent of the total commercial space absorption in 2012. These cities will grab the lion’s
share of contribution in total commercial space absorption in 2013, certainly within
the range of 74-76 per cent.
Retail and rental: Pranab Datta, Chairman, Knight Frank India, points that 2013 is
going to be a game changer in terms of policies and regulations, as most of the Bills
that have been pending are expected to be passed. The Real Estate Regulation Bill
and Land Acquisition Bill would boost sentiment.
Commercial/Office: Rohit Kumar, Head of Research, DTZ India, says the major
seven cities in India witnessed restrained office space taken up in 2012. Total office
space take-up across the major cities was recorded at 27 million sq ft, a drop of 23
per cent, compared with 2011. Rentals have remained same or are slightly down.
FY 2013 will see a drop of 10 to 15 per cent in office space absorption due to the
slowdown in the global and domestic economy. Vacancy levels will remain above 20
per cent in Mumbai and Delhi and over 15 per cent across other cities by end of this
financial year due to demand-supply gap.
INVESTOR HAVEN?
The Indian realty market, once a preferred and safe-high return investment option,
is increasingly making investors wary, amid sluggish sales and overall slowdown.
Industry estimates say India received about $18 billion in investments over the last
seven years.
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However, performance has not been very lucrative with exits worth $3.4 billion. PE
firms are also finding it difficult to raise capital from institutional and individual
investors alike, as most funds are faltering on returns.
Sachin Sandhir, RICS, points that the outlook is likely to remain tempered in relation
to growing concerns among investors that prime assets in several realty micromarkets are becoming overpriced.
India hasn’t really delivered since 2005 on the promise that it held as an investment
destination.
SCAMS GALORE
DLF was in the news for an alleged sweetheart deal with Sonia Gandhi’s son-in-law,
Robert Vadra. Anti-graft activist Arvind Kejriwal had alleged that Vadra had
purchased at least 31 properties worth over Rs 300 crore, for which money came
from “unsecured interest-free loans from DLF Ltd”.
Another scam that rocked India was the Lokayukta probing into allegations of
irregularities in land acquisition by the Karnataka Housing Board in Dharwad
amounting to Rs 20,000 crore.
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Railways expect Rs 3,800-cr investment
Business Standard,
December 26, 2012
The railways expect investments worth Rs 3,800 crore from the private sector for six
port connectivity projects, with the Cabinet approving the participative models of rail
connectivity.
The port projects approved by the Cabinet are Dighi (50 km), Rewas (23.9 km),
Jaigarh (35 km), Dhamra (64 km), Astaranga (80 km) and Hazira (47 km). The
models approved for first-mile and last-mile connectivity are private line; joint
venture; customer-funded and build, operate and transfer (BOT) projects. The
railways expect to attract more private investments for first- and last-mile
connectivity projects under these models.
A senior railway minsitry official told Business Standard: “With the agreements for
five models in the policy getting ready in another two to three months, we expect to
achieve around 75 per cent of the Rs 5,000-crore target from port connectivity
projects in the 12th Plan. In addition, we are hopeful of attracting more private
investments, as stakeholders have been kept in the loop during the process of
formation of this policy.”
News
TRYING TO GET BACK ON THE RAILS
Railways has a two-pronged strategy to bring private investments: Change in models
and easing decision-making process
Models
Changes in new participative models of policy
Private-line
model
1. Apportionment of 95 % on net revenue (after deducting
operations & maintenance costs from gross revenue)
2. No taking over of private infrastructure by railways
Joint venture
model
1. Capping of 14% rate of return removed (earlier the entity ceased
to exist after this)
2. Minimum concession period of 25 years with maximum up to35
years
Customerfunded
1. Railways will pay freight rebate of upto 7% on model amount
invested annually till private partyrecovers its costs
Decision-making process expedited; Railway Board gaining autonomy
* Railway Board authorised to approve projects with appropriate models where private
investment involved
* Empowered Committee under the chairman of Railway Board authorised to address
case by case concerns of projects
Source: Ministry of Railways
The railways have tried to address the bottlenecks in the earlier Railways’
Infrastructure for Industry Initiative (R3i) policy from two angles — bringing
required change in the participative models and expediting the decision-making
process, the official said.
According to the private line model, 95 per cent of the net apportioned revenue will
be shared with the private party, after deducting the operation and maintenance
costs. Earlier, 95 per cent was shared over the gross revenue. There would be no
takeover of private infrastructure by the railways, according to the new model.
“We did not get much response from the earlier PPP (public-private partnership)
policy, and although there was response from strategic investors like ports, they had
no other option,” said an official. However, the railways found it tough to attract
investments in joint ventures and customer-funded models as these models had
bankability issues: Lenders had questioned the revenue stream of projects under
these models.
The new joint venture model of the first- and last-mile connectivity projects has
removed the cap of 14 per cent on investment.
“With the minimum concession period of 25 years, extendable up to 35 years, it is
expected that banks will be comfortable in lending money to these projects, such as
new line and gauge conversion,” said the official. “The surety of revenue stream will
definitely attract the private party also. Earlier, capping of the returns to 14 per cent
and minimum traffic guarantee by the private party being compulsory were big
deterrents for private parties.”
News
In a customer-funded model, the railways will pay up to seven per cent of the amount
invested through freight rebates till the project beneficiary recovers the investment
with interest, at a rate equal to the prevailing rate of dividend payable by the railways
to general exchequer at the time of signing the agreement. Earlier, the railways was
giving a return of 10-12 per cent only on incremental outward traffic.
The ministry has also addressed the concern on expediting the decision-making
process so that it does not need to approach the Cabinet for approval of minor
changes in the policy.
The Cabinet note said: “The Ministry of Railways is permitted to execute the specific
projects by adopting appropriate models with the approval of the railway board in
case of non-government private model, connectivity funded by user investment and
joint venture of sanctioned projects.”
As the private party concerned will be investing, the approval of the railway board
will suffice to cut down the long process of approvals by the minister or the Cabinet,
according to an official.
The ministry will also set up an empowered committee under the railway board
chairman, to address case-by-case concerns of the projects. It will be authorised to
tinker with specific issues, without altering with the basic framework of the policy.
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Rs 4.8 lakh cr worth projects to wrap up this fiscal: CMIE
Press Trust of India,
December 26, 2012
Amid reports of slowdown in the economy and slashing of growth targets by various
agencies, data put out by Centre for Monitoring Indian Economy (CMIE) states that
projects worth a record Rs 4.8 lakh crore are expected to be completed in this fiscal.
This will be the highest ever project completion in a single year, it said. Incidentally,
during the last year (FY12), projects worth Rs 4.3 lakh crore were completed.
“The fact that many industries are slated to see a record or huge capacity addition in
FY13 is getting lost in the noise about the slowdown in capex,” the economic think
tank said.
“While it is true that new investment proposals have fallen sharply, a large number of
projects have failed to take off in the last two years, progress of the existing projects
has been slow and many have already overshot their deadline, but projects in
advance stages of completion are still chugging well. The industry is expected to
complete projects worth Rs 4.8 lakh crore in FY13,” CMIE said.
News
Industrial and infrastructural projects worth Rs 1.8 lakh crore were already
commissioned during April-November, this year, while information about projects
worth Rs 38,330 crore, which were supposed to get completed during OctoberNovember, is yet to be received.
According to CMIE, 1,700 projects worth Rs 3.8 lakh crore are scheduled to get
completed during December 2012-March 2013. Even if 75 per cent of these projects
meet their deadlines, the total completion during the year would be close to Rs 4.8
lakh crore.
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7 infra majors in fray for cargo berths at Chidambaranar Port
The Hindu Business Line,
December 26, 2012
Bidding for Rs 700-cr worth Tuticorin port projects begin, challenges galore
The bidding process to develop two cargo berths at the V.O. Chidambaranar port
(formerly Tuticorin port) may witness intense competition with as many as seven
parties in fray.
The Port Trust plans to build North Cargo Berth (NCB) – III for handling thermal
coal and rock phosphate cargo through public-private partnership on design, build,
finance, operate and transfer (DBFOT).
Similarly, NCB-IV is being developed to handle thermal coal and copper concentrate.
The bid for both the projects will be finalised on Thursday and Friday.
IN COMPETITION
The berths have attracted interest from Marg Ltd, Sterlite Ports, Adani Ports, besides
consortiums including the Hyderabad-based Transstroy (India) and Russian
company OJSC and SEW Infra and Malaysian company Pembinan Radzai Sdn Bhd.
IL&FS has teamed up with Italian firm Marine SPA, while ABG has taken
Netherland-based LDA (Louis Dreyfus) as partner for the port project.
CLEARANCE ISSUE
The Tuticorin projects are yet to receive environment clearance. Many port projects
have derailed in recent times due to prolonged delay in getting clearances.
A consortium led by Singapore-based Noble Group walked out of a project to build
an iron ore terminal at Paradip port in Odisha as the three-year delay in environment
clearances escalated project cost from Rs 590 crore to over Rs 800 crore.
News
In 2009, the Singapore company tied up with Gammon Infrastructure Projects and
MMTC for building a 10 million tonne iron ore loading berth at Paradip port.
The bid of Sterlite Ports placed last year for setting up iron ore export terminal at
Mormugao Port is yet to be finalised due to various issues.
The Jawaharlal Nehru Port Trust recently cancelled the contract for building the
fourth container terminal and encashed the security deposit of Rs 67 crore given by
Singapore's PSA International.
The consortium of PSA International and ABG bagged the Rs 8,500-crore project
after promising to share 51 per cent of revenue, the highest-ever offered in India's
port sector.
“Uncertainty caused by environment and other regulatory clearances not being in
place on time is a big risk for projects in Tuticorin,” said a Sterlite Ports
spokesperson.
TARIFF DISPARITY
The tariff for Tuticorin projects has been capped at $134 a tonne (coal and rock
phosphate) and $114 a tonne (coal and copper concentrates) compared to $186 a
tonne levied at NCB-II terminal.
This will pose a major hurdle if the cargo arrival falls short of expectations.
RISING PROJECT COST
The port has estimated the cumulative project cost at Rs 660-700 crore. Both the
tariff and project costs have been pegged lower as it was conceived four years ago.
In the current scenario, the estimated cost may be higher by at least 70 per cent, he
said.
CAPACITY DETAILS
The overall berth capacity for coal will be of 30 million tonnes per annum against the
floating cargo of 3.5 mpta.
The capacity is being enhanced keeping in mind the proposed power projects coming
up near the region, said an industry source.
“It is intriguing that the tariff has been fixed lower even as interest rates have gone
up substantially in last few years. Given the uncertainty in power projects and excess
capacity being built up for coal handling, the project may not be viable even with a
single digit revenue share," he said.
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