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N. Ramakrishnan

Chennai, Nov. 8 Till a few months back, players in the infrastructure sector were buoyant. The market was large and there were plenty of projects coming up. What they felt would be the limiting factor was management bandwidth — their own ability to get managerial and supervisory talent to oversee projects, a crucial issue in timely completion of projects.

Even now, amid the global economic turmoil, the infrastructure companies say the opportunities are still immense. But there is the added uncertainty of financing cost that has to be factored in.

According to leading players in the sector, projects that have achieved financial closure — where the promoters have been able to bring in their equity and tie up for loans with banks — should not face any problems.

At best, they might get delayed by a few months, for other reasons. But, those that are still to achieve financial closure will face huge delays, they say.

“Many infrastructure projects that were in the pipeline will find it difficult to achieve financial closure because of the limited availability of risk capital and debt financing,” says Mr Vikram Limaye, Executive Director, Infrastructure Development Finance Co Ltd.

The infrastructure needs of the country, he says, are large and will require international capital, which will be difficult to get in a cost-efficient framework today.

The leading players had foreseen newer entrants into the sector too picking up projects. Now, that seems unlikely to happen. Banks are more careful than ever before to lend, says Mr K.V. Rangaswami, Member of the Board and President, Construction, Larsen & Toubro Ltd.

Mr A. Subbarao, Chief Financial Officer, GMR Group, says availability and pricing of credit are two serious issues for the infrastructure sector. The requirement of funds for the sector is enormous and a bulk of it will have to come from overseas. That will be hit. Besides, private equity investment in the sector has also been affected.

With new and smaller players unlikely to get easy bank assistance, infrastructure projects are bound to be delayed.

The existing players will find it difficult to take up all these projects that would otherwise have been executed by newer entrants or smaller players. This, in turn, will lead to delays in a sector where facilities are inadequate, according to experts in the area. One solution would be for the Government to pump huge investments into infrastructure.

Both Mr Rangaswami and Mr Subbarao point to the higher cost of debt now — close to 14 per cent from 9.5-10 per cent a few months back — and say this will hit the viability of projects.

A road project, for instance, is typically structured on 70 per cent to 80 per cent of the cost coming in as debt. A nearly 4-5 percentage point increase in cost of debt will skew project viability. Added to this is the uncertainty over the traffic, which in turn affects the toll collection.

As a specialised funding agency, IDFC believes that sectors such as power, roads, ports, airports and telecom will continue to present opportunities. However, “we are cautious on certain sectors such as real estate, hotels, SEZs and IT parks given the expected slowdown in the economy and the supply dynamics facing these sectors,” says Mr Limaye.

More Stories on : Real Estate & Construction | Credit Market | Infrastructure

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