Mar 20, 2017 08:08 PM IST | Source: Moneycontrol.com

Comment: Don't rap pvt players for not playing infra story, show them money

Though private players have not taken the proactive step of creating assets, they have been participating in various government projects -- especially in road, railway and defence space. Over the last two years the speed of road building has picked up from 15.7 km per day in 2013-14 to over 20 km per day now. Nitin Gadkari, Minister for Road Transport and Highways and Shipping, is hoping to ramp it up to 30 km a day.

Comment: Don't rap pvt players for not playing infra story, show them money
Shishir Asthana

Moneycontrol Research

Private players haven’t been gung-ho investors in the infrastructure story. Why should they be when there has been no incentive to throw in their lot behind PM Narendra Modi’s big push to create more assets on the ground. In a cruel twist, banks turned wary of lending to them citing their own bad loan mess. The Central government has also looked to other avenues like foreign investors and domestic institutions to finance road and rail projects. Two questions present themselves. Who is to blame? And, are private players more sinned against than sinning?

Proactive Steps

Though private players have not taken the proactive step of creating assets, they have been participating in various government projects -- especially in road, railway and defence space. Over the last two years the speed of road building has picked up from 15.7 km per day in 2013-14 to over 20 km per day now. Nitin Gadkari, Minister for Road Transport and Highways and Shipping, is hoping to ramp it up to 30 km a day.

At a recent infrastructure summit organized by the Economic Times, Gadkari sounded sure that his government would be able to monetize about 101 projects under National Highway Authority of India (NHAI) which have been yielding an annual toll income of over Rs 10,000 crore. There are enough investors who are interested in the projects, said Gadkari. He, however, added that government will give the highest priority to local investors and contractors, hinting that private sector players will have put up their hands for winning contracts.

Even the railways ministry seems to be confident of raising money for its various projects. Railway Minister Suresh Prabhu in an interview with CNBC-TV18 said that in the last two and a half years out of the Rs 350,000 crore capital expenditure announced most of the amount is being raised outside of the Budget. It is tempting to look at it as Prabhu’s superior skills at sourcing funds, but the underlying fact is that the money will be used to place orders with public sector companies if private peers aren’t keen to grab these orders.

Further, with the government planning to list railway public sector undertakings, the ministry will soon be self-sufficient.

Financing Models

To be fair to the private sector players, their intent in participating in government projects is high. The projects that have been awarded to them are being executed at a quick pace, but the problem is in awarding of orders. Various financing models tried out by the government have not met with the desired response.

Take the Hybrid Annuity Model (HAM) which was introduced about a year ago which saw good participation from private players in the initial period. However, the funding mechanism requires private player’s equity contribution at only 10-15 percent which is outside the comfort zone of banks. Banks are reluctant to fund such projects, especially since many new players were applying for the projects. As a result, out of the 35 projects that were awarded only 15 achieved financial closure. Three projects were cancelled and some more are likely to be added to this list.

Clearly, the blame shouldn’t be laid at either the government’s doorstep or the private companies’. The other culprit—banks—may not be entirely off the hook. Poor quality of their books has prevented them from lending aggressively to private players. Expectations are that banks will continue to remain in stress for a few more quarters. Private sector players are missing out on the huge opportunity in front of them because banks are refusing to fund them.

Rather than blaming private players for not participating in the country’s development government should look at ways to help private players raise funds.
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