The Hindu Business Line : Stimulus package provides hope for infrastructure companies

While the moves to allow IIFCL to raise another Rs 30,000 crore and permit NBFCs to raise External Commercial Borrowings (ECBs) to fund infrastructure projects are aimed at infusing liquidity into the funds-strapped sector, a further round of rate cuts and the removal of interest rate ceiling on ECBs open the gates for more affordable borrowings.

Road orders

The measures come at a time when a number of infrastructure projects are struggling to achieve financial closure, even as several road projects are in the final stages of bidding. According to the National Highway Builders Federation, in November 2008, projects worth over Rs 10,000 crore were struggling to achieve financial closure. This apart, evaluations of qualification bids were completed for over 26 projects and 50 road project tenders have been invited. The latest stimulus is expected to fund these stalled projects as well as those in the pipeline.

Companies such as Larsen & Toubro, Hindustan Construction and Maytas Infra are some of the key bidders in the road projects to be awarded. The order flow and execution of these projects could be smoother after the stimulus measures.

The initial tranche of Rs 10,000 crore to be raised by IIFSL, plus the Rs 30,000 crore to be accessed over the next 18 months, will be deployed in eligible public-private partnership (PPP) infrastructure projects by way of refinancing for banks. These tranches are expected to fund an estimated Rs 1,00,000 crore infrastructure projects, mostly in the road and port sectors.

It needs to be noted that as the funds raised are meant only for refinancing banks. The overall lending to the infrastructure sector by the banks could be much more, provided banks shed their inhibitions in lending to the sector. The measures could also encourage bids from players who have been reluctant to bid for PPP road projects, due to unattractive returns as a result of higher interest costs.

Lower cost of borrowing

The removal of “all in cost” ceiling for raising ECBs raises the maximum rate and the period for which ECBs can be tapped by companies. Companies such as Punj Lloyd and L&T, who frequently visit the ECB market and have superior credit standing, could have access to relatively low-cost funds through this route. While the first package ushered in a regime of falling interest rates, the recent stimulus may significantly lower the cost of borrowing for corporates. Average borrowing cost of infrastructure companies were hovering at 14-16 per cent until recently. This may stand reduced to 9-12 per cent, as impending rate cuts and access to funds for NBFCs open up additional funding sources for the sector.

ECB for realty

On the real estate front, the most significant incentive is the permit given to realty developers to raise ECBs for developing integrated townships. A ban on raising funds for such townships was imposed in May 2007. This facility would, however, be reviewed in June 2009. This measure could benefit all key realty players such as DLF, Ansal Properties & Infrastructure and Parsvnath Developers who have planned for townships.