Indian Infrastructure
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Indian infrastructure
Problems:-
Gearing has increased significantly, and financing terms mean that PPPs are more exposed to interest rate volatility–causes for concern in a period of rising rates and reduced liquidity. Further growth in PPPs will likely require a broadening of the sources of financing once the present financial market turmoil has lessened. Addressing these concerns will call for policy reforms to capital markets and concession frameworks.
PPP deals rising in India in road and urban infrastructure projects
1995-2007 senior debt accounted for 68 % of project financing on average. The rest took the form of equity (25 percent), subordinated debt (3 percent), and government grants (4 percent), typically “viability gap” grants provided during construction to PPPs deemed economically desirable but not financially viable. Of the senior debt, about 70 percent was provided by commercial banks, four-fifths of this by public sector banks. The rest of the total debt financing came from institutional lenders (around 23 percent), with 5 percent provided by the International Finance Corporation. Bond markets were used sparingly. The use of subordinated debt also remains limited. Its use has become more common, however, particularly in the road sector, which has the largest number of projects and the greatest acceptance by financial markets. But most of the subordinated debt has been provided by the senior lenders themselves
On the equity side, more than 80 percent came from project developers, with the next largest contributor being the public sector. Strategic investors made direct equity investments in the special-purpose vehicles established to implement the PPPs for only nine projects in the sample. These investments total almost $167 million (6 percent of the total equity), most of it in the airport sector. Equity investments by financial institutions provided the rest.
Debt-equity ratios for Indian PPP projects have been rising:-
Role of senior debt has grown while the share of equity has declined
Commercial banks have become more comfortable with PPPs, particularly in the road sector, and are therefore willing to have senior debt make up a larger share of project financing.
There are some indications that lenders and developers view grants as substituting for the equity infusion needed during construction
The few projects involving a negative grant–a payment by the PPP to the government–also have a higher ratio of senior debt to equity, suggesting that these payments are being financed by debt borrowed by the PPP project.
Low equity contributions make it easier for developers to achieve a target return from the margin on construction and reduce their long-term interest in the project
Some countries put limits on D/E. But restricting an investors ability to choose its capital structure can increase the cost of capital, prevent companies from reaping tax advantages associated with particular types of financing, and impose a monitoring burden on the government. Alternatively, India could consider a different basis for termination payments, reducing the incentive to use debt embedded in the termination clauses of its model concessions. In the United Kingdoms PPP program the government pays the market value of the asset
Debt market in India:-
Average spreads on debt to PPP projects has reduced whereas corporate bond spreads increased during the same period
Financial markets increasing acceptance to PPP road projects
Tenor of debt has increased little with current average around 14-15 years
Shorter reset period
Asset beta for the projects came out 0.6-0.7
But as interest rates began to increase, concerns arose about the impact on PPPs, because the concession contracts have no provisions for passing on higher interest charges. Continued increases in rates as well as a tightening of credit could have adverse effects on some projects.
Indian market highly dependent on banks which suffer from ALM. So proposed solution was to go for bond market. An active bond market can increase the flow of long-term funds and reduce reliance on banks. The Indian corporate bond market is still at an early stage of development, and its growth is hampered by institutional, legal, and regulatory constraints that make bonds a more expensive way of financing debt. On the equity side, participation by foreign players, particularly strategic investors, has been low even though PPP projects in the sectors studied are allowed to have 100% FDI. FDI accounted for only 11% ($322 million) of the total investment. The port sector had the largest share (51%) of this foreign investment, followed by airports (32%) and roads (16%). Only nine projects were reported to have strategic investor participation: four in ports, three in airports, and one each in water supply and railways.
Few pure equity providers are willing to invest directly in SPVs because many concession agreements put restrictions on the sale of developers equity. Encouraging pure equity providers to do so will require more liberal norms allowing them to participate at the time of bidding or to enter later with a majority stake.
Risks in toll road projects:-
Construction risk
Political risk
Currency risk
Force majeure risk
Acquisition of long segments of right-of-way
Unforeseen geological and weather conditions that may increase costs and cause delays
Unpredictability of future traffic and revenue levels.
Power projects, for example, may face fewer risks than toll roads because the physical plant is in one location (which facilitates land acquisition) and future revenues are generally secured by a long-term power purchase agreement.
Private toll road development covers only 8% of annual market for private infrastructure projects. Power – 30%, Telecom – 28%
Highway infrastructure traditionally has been funded through general government budgets and dedicated taxes and fees rather than tolls. In most industrial countries 90% or more of highway kms are publicly funded; in developing countries governments