The absence of long-term financing instruments is a major impediment in developing infrastructure projects in India, leading to stalling of projects and shortage of good developers, a report has said.
Bank credit, the principal source of debt funding available to all infrastructure projects is available only for the tenor of 10-15 years as against the concession tenure, typically in the range of 20-30 years, said a special interest paper on Indian infrastructure released by the City of London Corporation. “Unavailability of long term patient capital poses a significant challenge for project developers having long term contracts with inherently long gestation period,” it says.
According to the paper, absence of a deep corporate bond market in India and muted participation by pension funds have inhibited credit availability for infrastructure projects. “While the 10-15 year tenor is short from the point of view of project companies, it is too long for banks resulting in an asset-liability mismatch issue,” said the Corporation which is the hub of UK’s financial centre.
Domestic commercial banks also face significant challenge in extending long-term credit as many of them have already reached lending exposure limits for the infrastructure sector. As a result, banks face the concentration risk. Considering the over-leveraged balance sheets of majority of players in the infrastructure sector, any delay in project execution has a direct bearing on their loan serviceability and a corresponding stress in the asset position of lender banks. “This creates significant contagion risk for the lender banks and also impacts their ability to lend further credit to infrastructure sector,” the City of London report says.
According to the Financial Stability Report published in June 2015 by the Reserve Bank of India, with 17 per cent share in total advances of banks, the infrastructure sector accounted for nearly 30 per cent of total stressed assets.
It further said lack of an independent regulator is another issue. Each sector — roads, power, telecom — has a dedicated set of rules and regulations, as well as governing bodies. In the roads and railways sector, the governing body operates in twin capacity – as an ‘operator’ and as a ‘regulator’.
“Thus, in the roads sector, the NHAI is responsible for grant of concession/ project as well as for overall monitoring and control. This is unlike the arrangement in the telecom sector wherein, policy decisions rest with Telecom and Regulatory Authority of India and appellate functions rest with Telecom Disputes Settlement & Appellate Tribunal,” it said.
The report said pooling of operational and regulatory functions with the same body may lead to a conflict in its functioning. “This arrangement may not bode well for independent and unprejudiced administration of contracts by the regulator,” it said.
Challenges in land acquisition prove to be a significant impediment on speedy approvals and clearances for projects. There is no uniform policy on levy and collection of toll across India, it said.
As per the Department of Economic Affairs (DEA) database, as of October 2015, close to Rs 350,000 crore worth of PPP projects were under execution in various parts of the country (including central as well as state level projects). However, the private sector participation through the PPP model has slowed down significantly over the last 3 years with a number of projects getting delayed or stalled due to a variety of reasons.
Lack of deep corporate market hurting credit
Bank credit, the principal source of debt funding available to all infrastructure projects is available only for the tenor of 10-15 years as against the concession tenure, typically in the range of 20-30 years.
Absence of a deep corporate bond market in India and muted participation by pension funds have inhibited credit availability for infrastructure projects.
According to the Financial Stability Report published in June 2015 by the RBI, with 17% share in total advances of banks, the infra sector accounted for nearly 30% of total stressed assets.
Domestic banks also face a challenge in extending long-term credit as many of them have hit exposure limits for the sector.