Without infrastructure, an economy cannot grow. Industry and services cannot expand without highways, electricity, ports and airports, rail links and pipelines. The 12th Plan (2012-17) projects infrastructure investment of a trillion dollars.
Alas, infrastructure has hit a wall, and been knocked semi-conscious. This has seriously undercut India’s future growth potential. No remedy is in sight.
The government claims India is a global leader in public-private partnerships in infrastructure. The private sector financed 36% of infrastructure in the 11th Plan (2007-12), and is expected to finance fully 50% in the 12th Plan. This is now a pie in the sky. Corporations that charged into this sector have suffered heavy losses. They expected a gold mine, but found only quicksand. They have been hit by financially disastrous time and cost overruns.
Infrastructure was historically funded almost entirely by the government. Cost overruns were endemic, averaging a phenomenal 61% back in 1991. These were financed by grabbing more taxes from the public or by printing money.
However, these options are not available to corporations. Infrastructure requires heavy loans, often twice as much as equity. Such loans have a fixed repayment schedule. If a project is completed on time, revenue from the project will finance the repayments. But if there are delays of months or years, the project is squeezed badly. It’s even worse if projects are unable to operate (such as 30,000 MW of power projects stranded without fuel) or suffer from sudden changes in environmental regulations (as in Hindustan Construction’s Lavasa township) or from outright cancellations (as in the scam-ridden 2G telecom case).
Five years ago, investors were pouring money into infrastructure companies, and their share prices skyrocketed. Everybody thought these companies were entering a golden period. This included politicians, who demanded huge kickbacks (the 2G scam is only the tip of the iceberg). The companies paid up, confident that their returns would justify kickbacks.
Today they are in financial straits, and their stock market prices have crashed. GMR Infrastructure (which runs Delhi and Hyderabad airports, apart from many power plants) is down from a peak price of Rs 131 to just Rs 24. It lost Rs 94 crore in the April-June quarter. The CAG believes that GMR has been gifted enormous sums by a sweetheart deal for the Delhi Airport, but there is no sign of this in its accounts.
GVK Projects and Infrastructure (also in airports and power plants) is down from a peak price of Rs 85 to Rs 14 today. It lost Rs 64 crore in the last quarter, and has now lost money five quarters in a row.
Lanco Infratech lost a phenomenal Rs 441 crore in the last quarter and cannot repay its loans. Its share price is down from Rs 84 to Rs 14. Another group company, Lanco Industries, has lost money in three of the last four quarters. Hindustan Construction’s price has crashed from Rs 132 to Rs 17. It suffered a staggering loss of Rs 222 crore in 2011-12.
Reliance Power is down from Rs 500 at the time of flotation to Rs 97; Reliance Infratech is down from a peak of Rs 2,584 to Rs 545; and Reliance Communications is down from Rs 820 to Rs 65. Other telecom companies have also suffered: Idea Cellular is down from a peak of Rs 157 to Rs 85.
The companies are not blameless. Infrastructure has always been a dirty business. Some companies overbid for projects, expecting to later manipulate conditions to make the project profitable. The Hazare anti-corruption effect has ended such manipulation.
Some road companies bid too aggressively, and find that the traffic is too low to cover costs. Others have bungled clearances by cutting corners.
Yet, most of the blame lies squarely with governments. Land acquisition has been delayed for years. Clearances under forest, tribal and environmental regulations have taken years. Tariffs for power and other items have simply not been revised in line with rising costs.
So, equity and debt markets have lost faith in Indian infrastructure, and will not provide the funds required. Foreign financiers have become extremely wary. Indian banks claim to have crossed their maximum exposure to infrastructure loans, and refuse to lend more. Besides, existing loans are not being repaid.
Infrastructure now faces a huge funding gap of hundreds of billions of dollars. This cannot be filled by additional government funding. The government is already struggling to contain a huge fiscal deficit. Any spare cash will go to pre-election goodies, not projects.
So, infrastructure is being starved of both private and public sector funds. India’s future growth is in danger. Urgent measures are required to make the sector viable and capable of attracting capital.