If India is to realise its growth ambitions, infrastructure is the growth lever that will bring to life the vision of sustainable and inclusive growth
Words by Sakshi Dhingra
Infrastructure is one of the most crucial building blocks for national progress, and India is taking the lead in this effort by allocating resources and attention to its development at both the central and state levels.
But its impact goes beyond nation-building. As “Make in India” takes priority and the China Plus-One strategy becomes more than just a thought piece, manufacturers are turning to India with a fresh focus. This too results in a renewed focus on infrastructure development in the country, and we sit down with a titan of the space, BVN Rao, to better understand his vision and wishlist for growing Indian infrastructure.
What do you consider to be progressive or regressive terms when describing an infrastructure investment project?
The previous year witnessed the highest ever budget outlay, signifying a strong commitment to economic growth. The recently announced interim budget continues in the same vein, with an impressive 11 percent increase in outlay from the previous year. This demonstrates the government’s clear understanding of the pivotal role infrastructure development plays in driving our economy towards the ambitious 5 trillion mark.
However, it is evident that the funding and agreement terms for infrastructure projects have been somewhat outdated and restrictive. With the scale of infrastructure projects reaching unprecedented levels, it is imperative that these terms are revisited to ensure the smooth and efficient development of infrastructure across the country.
How do progressive terms in infrastructure investment projects contribute to societal and economic development?
A good, well-developed modern infrastructure is the backbone of a truly developed nation. If we want prosperity to percolate to the rural and remote parts of our country, infrastructure development is the key. Connectivity, free flow of services, giving a push to industrial and agricultural sectors, providing better health care and education all deeply depend on the quality of infrastructure available to the people of a society. The infra sector would also play a very important role in generating employment opportunities. Therefore, it is crucial for governments and stakeholders to prioritize investments in infrastructure to ensure sustainable growth and development for all citizens.
How do progressive terms align with sustainability goals and environmental stewardship in infrastructure projects?
Sustainability and development today go hand in hand and are in no way contradictory. Considering the population pressure and rising aspirations of people from all walks of life, we must adopt a model of development that educates individuals on what is environmentally desirable. While governments and agencies will take necessary actions, the support of the people in our country is crucial in achieving our sustainability goals and promoting environmental stewardship. When looking at measures such as the average ecological footprint, our nation fares better than several other developed nations. However, there is still room for improvement, and development can serve as an enabler in furthering our environmental efforts.
How can progressive terms reflect innovations and technological advancements in infrastructure development?
As previously stated, the ability to adapt to the varying project lifecycles associated with larger scale projects, along with flexible project funding arrangements, is crucial in fostering innovation and technological advancement within the infrastructure sector.
Conversely, obstacles such as cashflow challenges, disputes with employers, and a lack of contractual flexibility can impede progress in the field of innovation and hinder the integration of new technologies. It is imperative that stakeholders within the industry address these challenges proactively to create a conducive environment for growth and advancement in infrastructure development.
Are there instances where short-term thinking may lead to the adoption of regressive terms in project descriptions?
When discussing infrastructure projects, such as EPC projects where contractors are awarded orders based on Commercial L1, it is imperative to consider the importance of technical innovation and the use of high-quality materials. In order to promote innovation and encourage the adoption of new technologies, it is recommended that a certain level of weightage be allocated for these factors.
By incorporating a balance between technical advancements and commercial considerations, we can ensure that projects not only meet financial objectives but also contribute to the advancement of industry standards. This approach will ultimately lead to more sustainable and efficient infrastructure development in the long run.
Based on your insights, what recommendations would you offer to industry leaders and policymakers to promote the use of progressive terms in infrastructure discourse?
There are a few recommendations I would make. This includes:
The Adoption of ELM rating for infrastructure companies:
Under conventional rating system the Credit Rating Agencies (CRAs) downgrade the rating to “D” in case of any payment delay even 1day delay of even Rs 1. This constrains any further funding for operations or project construction. Infra Projects have inherent long-term nature & stable cash flows post COD. A lower rating based on initial project cash inflows without considering project lifecycle cash flows results in higher financing costs. IRDA/ SEBI have already brought in place modalities for considering ELM based rating for infra projects. Same needs to be implemented by Banks to rate & finance infrastructure projects.
Frequency of interest payments:
As per RBI guidelines, interest must be paid to Banks at monthly intervals. Even in case of a delay by 1 day, the account falls in SMA1 & any further delay lowers it to SMA2, SMA3 & then NPA.
In the case of Infra projects, cash flows are lumpy due to dependency on counter parties, generally Government Agencies. During the initial period inflows are constrained and it slowly builds up based on growth factors, which may result in mismatch in short term cash flows.
Industry bodies have represented to RBI to offer flexibilities to Banks for periodic (quarterly/semi-annual) interest payment mechanisms for infrastructure projects based on cash flow assessment. This policy change will not only facilitate the projects to have matching cash flows but also help banks overcome undue stress for infrastructure projects. There is also a need for long-duration debt, with 15 years+ debt repayment period.
Further, there is a need to bring back flexible Structuring of long-term project loans to Infrastructure and Core Industries – 5/25 Scheme
To overcome issues of asset-liability mismatch & enable longer-term financing of infrastructure projects, RBI, Notified the 5/25 scheme in July’14 allowing refinancing/restructuring of existing loans which are not NPA without the account being classified as ‘substandard’.
“Prudential Framework for Resolution of Stressed Assets” notified by RBI in June’19 terminated it. It stated that in case of restructuring, the accounts classified as ‘standard’ shall be immediately downgraded as non-performing assets (NPAs) and attract provisioning as per the asset classification category.
This has completely stopped all restructuring/refinancing of genuine infrastructure loans as even elongation of repayment tenor is construed as ‘restructuring’ & loan being classified as sub-standard. This crippled the ability for infrastructure companies in refinancing through new lenders, thereby taking away competitive forces which would have helped in discovering lower costs for good infra loans.
Ironically, in case there is a change in control, RBI circular allows the loan classification to remain unchanged. This is stacked against the existing promoters who have taken all the pains and the challenges to build an infrastructure asset in the country and prods banks to look for change of control if a loan restructuring for an asset becomes essential.
Nowhere in the world is refinancing treated as restructuring. In fact, restructuring is seen as a way to reduce average cost of debt. For instance, in the UK, under the
prevalent IFRS guidelines, if the terms of a loan are changed, the asset quality/ categorization does not change.
Further, provisioning for assets in each stage is determined based on discussions with the Statutory Auditor after taking into account the risk profile of the asset, instead of the standard rates of provisioning as in India. Notably, this argument also supports our case for ELM rating based provisioning.
We would therefore request that “Flexible Structuring of Long-Term Project Loans to Infrastructure and Core Industries – 5/25 Scheme” be brought back.
Another measure is the financing/refinancing infra parent/holding companies to support SPVs.
Currently there are restrictions in Bank finance to holding companies. Given the importance of holding companies which support the project SPVs both during construction and operation phase it will be important for holding companies to have access to bank finance so that it can meet the liquidity requirements of the SPVs as and when required.
We also request easing guidelines to allow long-term finance to infrastructure sector
IRDA has allowed insurance companies to invest in A rated assets provided they have high ELM rating. This approach should be followed by PFRDA, EPFO for their investment norms also. Further, IDFs (Infrastructure Development Funds) to be allowed to provide long term funding for fresh capex for infrastructure projects which are long term and create National Assets instead of current preference of refinance/ takeout financing only.
Lastly, we must look at credit enhancement through BG/SBLC support to infrastructure companies.
Banks should be encouraged to extend BG/SBLC to operating SPVs, which can improve their credit rating for easy access of long-term capital in local and international markets.
Mr. BVN Rao is Member Group Holding Board and Business Chairman (Transport and Urban Infra), GMR Group. Views expressed in this article are the personal views of Mr. BVN Rao and need not be construed or connected to the organisation where he is associated.
