A Pandora’s box may have just been opened

The IL&FS saga has opened up a Pandora’s box of issues that the infrastructure sector has been struggling with for years, and could cause greater harm in the days to come.

While the IL&FS case per se may be one-off, there are issues that all the industry players, irrespective of their financial strength and credit profile, are facing.

Infrastructure developers are now becoming increasingly vocal about their exposure to projects financed by the government or its agencies. “I know of at least two large infrastructure players, besides IL&FS, that have almost stopped bidding for projects after they have burnt their hands with the government not being able to release awarded payments or solve disputes, causing enormous delays,” an industry insider who did not wish to be named told BusinessLine .

Slow arbitration

Another industry player pointed out that the arbitration processes take four-five years. Even after being awarded, the payments do not flow to the developers despite a special instruction on this released by the NITI Aayog in 2016. “The payments have to be released against bank guarantees, but getting those from the lenders have become difficult,” the person added. “The same goes for bank guarantees required to bid for new projects. It becomes a challenge for EPC (engineering, procurement and construction ) companies that eventually become unable to keep their order inflows at healthy levels.”

“Much of the stress in the sector is because the government payment track record needs to be improved,” noted Suneet K Maheshwari, founder and Managing Partner at Udvik Infrastructure Advisors and ex-MD of L&T Infra Finance. “Secondly, we have not developed a quick way of disposing of differences and problems.”

He added that apart from IL&FS, which claims to have ₹16,000 crore stuck with government agencies, several large developers face similar challenges. “Delays cost businesses working capital shortages, liquidity problems and consequent defaults. Thus their investment appetite is impacted till they fully recover,” he said.

Experts believe infrastructure financing will continue to be a challenge for years to come, with most of the spending coming from the exchequer.

Bank lending for infrastructure projects has been muted for several years now, with the last two fiscals seeing negative credit growth, according to Crisil. Post the IL&FS crises, even alternative routes such as NBFS funding or bond markets could be a problem for infrastructure developers with a history of large borrowings.

“Lenders have been very choosy when it comes to project financing or even debt refinancing for infrastructure companies. However, companies without a history of raising debt are in a better position,” said an industry player who did not wished to be quoted.

Shailesh Pathak, CEO of L&T Infrastructure Development Projects Ltd, believes infrastructure finance needs recalibration. The project construction should be financed by the government while operating assets should be sold to long-term, ‘patient’ capital so that the proceeds may be recycled into fresh construction, he suggests.

Capital recycling

Industry experts say the government has been looking to identify capital recycling models for infrastructure segments beyond roads — it has already come up with the toll-operate-transfer (TOT) model, wherein it leases completed and operational assets to long-term investors. The first TOT auction, won by Macquarie, fetched the government ₹9,681 crore.

Going further, experts note, sectors like power, capital goods, water and waste treatment are unlikely to see any significant growth in lending.

On the other hand, roads and power transmission and, up to some extent, renewable power, are considered safer by the banks.

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