IL&FS crisis may sound death knell for PPP
Delays, the poor health of sponsors, stressed assets and the reluctance of banks to provide funding has derailed many plans, with several projects headed to the bankruptcy court.
The default crisis that has struck IL&FS, flagbearer of the public-private partnership (PPP) programme, may be the last straw for this once-promising avenue of infrastructure development, experts and executives said, adding that the government will have to take over that role once more. The private sector’s enthusiasm for investment in infrastructure has in any case been waning for some time now, they said.
India had aimed to fuel its ambitious infrastructure plans through PPP, but delays, the poor health of sponsors, stressed assets and the reluctance of banks to provide funding has derailed many plans, with many projects headed to bankruptcy court. Industry believes that if India wants to create infrastructure, the government will have to do it.
The infrastructure sector has been having problems since 2013 but the IL&FS case will be a nail in the coffin for PPP, said Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance. “India’s PPP story is over and government will have to fund infrastructure growth,” he said. “Operational projects will change hands, original promoters and banks will lose money. The acquirers, mostly overseas investors, will get a cheap deal and make some money. But nobody will invest in greenfield projects.”
His company changed tack some five years back and decided not to invest anymore in infrastructure but to focus on equipment lending, which he says is thriving thanks to government-financed projects. According to the Economic Survey, India will need to invest about $4.5 trillion to upgrade and increase the capacity of its creaking, choked infrastructure, of which it should be able to garner about $ 3.9 trillion. Rising income levels and economic prosperity are likely to further drive demand for infrastructure investment over the next 25 years and widen the gap from the estimated $526 billion, experts said.
Investments by the private sector could have helped bridge that gap had the PPP model not been on the verge of collapse. The Nat iona l Highways Authority of India (NHAI) realised that private sector was not keen on investing in roads and has since 2011 scaled up the proportion of engineering, procurement and const ruct ion (EPC) projects. These a refinanced by NHAI and executed by private sector contractors.
“The earlier contractor-developers, who were the first set of people who put in money, are licking their wounds and saying they won’t touch PPP again,” said Vinayak Chatterjee, chairman of Feedback Infra. “The big bucks that are coming in now are from long-term institutional investors for brownfield operating assets, avoiding greenfield projects and associated development and construction risks.”
In 2013, Maharashtra’s ambitious Mumbai trans-harbour link project received no bids when offered under the PPP route on concerns over viability. It was finally awarded in 2017 on contract basis. Almost all mega infrastructure projects since then have been offered on EPC basis, providing much-needed cash to otherwise cash-strapped companies. Those that entered the PPP space, such as Larsen & Toubro, Reliance Infrastructure and GMR Group among others, have decided to be asset light.
“PPP projects were not happening anyway because banks are not giving finance, not even for hybrid annuity,” said HCC chairman and managing director Ajit Gulabchand. “There are delays in projects that are due to geological reasons, delay in permissions, and other reasons that cannot be attributed to the concessionaire.” IL&FS has consolidated debt of Rs 91,000 crore, of which Rs 57,000 crore is accounted for by bank loans. A significant portion of revenue was in the form of receivables, and around 50% of this is blocked in litigation and arbitration.
The current government had looked to revive the PPP programme early on its tenure with initiatives such as 3P India and other policy reforms . “Private capital, today, is highly antagonistic to PPP. Many others, have burnt their fingers besides IL&FS,” said Chatterjee of Feedback Infra. “There is a sea change in the appetite of investors coming in to fund infrastructure projects.”
The insolvency framework is addressing the issue of stressed assets but the haircut for promoters and banks may be significant. The power sector, which has almost 40,000 MW of stressed assets, saw bids for around Rs 1-2 crore a megawatt for projects that were on the block, against capital cost of around Rs 5-6 crore per MW spent on them. That makes the prospect of the developers bouncing back and getting into new projects bleak.
The government will have to overhaul the system with an indepth study of the industry’s capability, ensure smooth implementation of policy changes, enable financing and expedite structural reforms, experts said. But with elections coming up, most infrastructure players expect little to change for PPP projects over the next few quarters.