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Infrastructure Financing and FundingAbstract  India is the expeditiously advancing economy in the world as per Central Statistics Organisation (CSO) and International Monetary Fund (IMF). Annual GDP growth rate of India has been recorded as 7.1% in 2016.

The acceleration in the improvement of India’s Economy can be regarded as a result of strong government reforms. As we know Investment in Infrastructure drives GDP growth and creates economic value. This is only possible when National Highways Authority (NHAI) and other infrastructure authorities avoid poorly managed infrastructure investments. For instance both “BOT” and “BOOT” projects (Build operate transfer/Build own operate transfer) are debt financed, these days companies are over- investing in unproductive projects which ultimately results in piling up of debt issued by investment banks (Foreign banks are included) and to overcome being considered Non- performing assets (NPA), companies file for schemes of debt restructuring which again leads to instability in financial markets and economic fragility. More over private investors are not interested in investing in infrastructure projects due to certain policies and implementation aspects related to land acquisitions, environmental clearances, shifting of utilities before handing over the work sites to the contractor so on and so fourth.

Most of the present day Green Field projects and other bottle neck projects are facing cost over-run and schedule over- run due to variety of regulatory hurdles as stated above resulting in growing debt piles.  Until or unless infrastructure authorities and Government of India come up with schemes to tackle financing infrastructure problems, the country will be dragged into infrastructure led national financial and economic crisis due to huge debts.  Our research paper mainly focuses on challenges faced in financing infrastructure sector and infrastructure companies and discuss about funding v/s financing infrastructure projects, effectiveness of debt restructuring schemes prevailing in India and finally about the ways for funding infrastructure. Introduction:For highways NHAI (National Highways Authority of India) was set up by an act of the parliament, NHAI Act. 1988 “An act to provide for the constitution of an Authority for the development, maintenance and management of national highways and for matter connected therewith or incidental thereto”.

NHAI has been assigned with National Highways Development project along with some minor projects which consist of 50329 Kilometres of National Highways for development, maintenance and management. Now NHAI’s primary objective is to ensure that contracts are given to the best companies to execute the contract on basis of “Bid Criteria”.   Most of the projects were awarded without checking on the project’s preparedness and viability. NHAI has awarded projects to many Infrastructure companies even when land was not acquired, environmental clearances and forest clearances.In most of the cases Ministry of Railways has been slow in action and response when it comes to ROB(Rail Over Bridge) and RUB(Rail Under Bridge) clearances. From the information available nearly 90 clearances from railways are yet to come, some of them are pending for as long as 3 years. There are some cases when defence ministry had delayed the transfer of defence land, some of the clearances are pending for five to seven years.

Ministries whose contribution played an integral part in timely completion of      infrastructure projects were oblivious with the devastating crisis created due to cleared sanctions and clearances. Model Concession Agreement (MCA) requires only 80% should be made available to the concessionaire with in the 60 days of submission of performance guarantee, whereas Department of financial services (DOFS) has ordered all the banks that Infrastructure companies shouldn’t be granted any debt until or unless 100% of land is made available. For instance Transstroy’s Polavaram project across Godavari River was delayed due to Environmental clearance, as 276 villages were not evacuated. Even IVRCL’s special purpose vehicle (SPV) IVRCL Indore Gujarat Toll-Ways Limited has suffered schedule over run and cost run, out of 155km of project scope around 16 kilometres length in different sections was not handed over to the concessionaire by NHAI due to presence of forest and forest bird sanctuary. Due to this kind of schedule over run Infrastructure companies are facing problem of cost escalation as a result the concessionaire runs out of funds and slippages start to occur. Project execution suffers, which leads to termination of the project.

If the project is terminated, bank guarantee is en cashed by the clients due to non performance of the contract. If the project gets terminated abruptly without starting a toll the banks that have issued loans receive nothing from their investment as a result NPA goes high due to these bad loans and cannot be written off their books. Most banks and institutions are now comfortable for financing smaller ,less risky PPP deals while very few expressed an interest for financing risky infrastructure projects.The developers lost opportunities and suffered under utilisation of deployed resources, lenders had to cope up with default in debt services and requests for restructuring. The public could not avail the benefits of completed roads and government itself looses enormous revenue which it could have received had the projects been timely completed. So we assume that delays in clearances and debt financed overinvestment leads to instability in the economy. Finally we advance policy propositions grounded in our finding to enable policy makers in India and elsewhere to improve the quality of decisions related to Infrastructure Investments.

 Problems faced by infrastructure companies at different stagesBy checking on the problems faced by infrastructure companies helps us to formulate necessary measures to improve the financial viability. INITIAL CONTRACT STAGE:Most of the contracts are client favourable. There have been problems with some high profile projects with utmost national importance where the private sector took on patronage risks when they were probably not the best party to manage them and subsequently suffered significant loss when the patronage levels were lower than the forecast.This is the point where we think about Government’s assistance in completion of project.BIDDING STAGE/EXECUTION STAGE:As we know there is a cut throat competition.

Many infrastructure companies are bidding for a contract at less viable rates. Companies operate at low profit margins due to competition. Later due to some implicit factors and explicit factors delays results in schedule overrun which again ultimately leads to cost overrun. Wrong anticipation of traffic is also one of the factors promoting loss to the companies because after the completion of the projects and established toll gates ,if the traffic is less than anticipated contractor ends up in loss. For instance reduced growth of traffic on account of economic slowdown, restrictions on mining decline in manufacturing and exports.

Judicial activism resulted in mining activity in many places coming to stand still. many stretches got effected by the sudden ban on mining activities and the resultant drop in cargo traffic. WHY PROJECTS DELAY.

.??Ø  Developer/client related factors: 1)Late release of interim payments 2) Slow decision making  3) Developer initiated change orderØ  Consultant related factors 1) Late release of drawings and details2) Discrepancies in drawings and details3) Constructability of design details 4) Delays due to other consultants Ø  Contractor related factors 1) Rework due to mistakes /Low quality2)  Subcontractors delays3) Poor resource allocation4) Low overall productivity Ø  Construction material related factors 1) Poor material procurement planning 2) Shortage of material in market 3) Changes in material during project execution4) In-accurate estimation of material requirements5) Non reliability of material deliveryØ  Labour related factors 1) Shortage of skilled man power 2) Shortage of unskilled man power 3) Shortage of managerial /supervisory personnel4) Low labour productivity5) Haig waiting time for availability of work teams Ø  Equipment related factors1) Shortage of proper equipment 2) Low efficiency of use/high down time 3) Wrong selection of type/capacity4) High waiting time for availability of equipment 5) Low productivity of equipment operators  Ø  Nature/external factors 1)      Rain and other natural disruptions 2)      Waiting time for approvals from authorities 3)      Waiting time for test sample inspection4)      Un Anticipated material cost fluctuation 5)      Low /no-work due to FestivalsØ  Project specific factors1)      Unforeseen ground conditions 2)      Unrealistic construction schedules 3)      Small/inaccessible site area 4)      Disruption in site supplies (power/water etc)5)      Lack of coordination among project teamsØ  In Adequate communication between-1)      Client and contractor 2)      Client and designer 3)      Designer and contractor 4)      Contractor and sub contractor 5)      Within contractors and teamØ  Management related factors1)      Insufficient working capital2)      Insufficient construction planning 3)      Strict labour policies ‘4)      Strict Inventory policies 5)      Ineffective project control methodsIn the above factors the risk related to the highlighted factors must be shared by the authorities of infrastructure as well for the collective good and completion of project. There are few more factors like removal of structure reserved for religious or spiritual rituals Companies face resistance by the locals towards the project, results in delay of work.

There was a case where National Green Tribunal abruptly stopped mining of sand which left the field open for illegal sand mining because construction had to be carried out and there was no legit way of accessing sand due to the ban. The cost of the sand went extremely high. Restriction was placed on the mining aggregates and on soil borrows by many state governments.

Similar handicap was faced when State Government restricted borrow areas and in mining aggregates. Arbitrary actions by other Ministries and State Governments create a chaos situation in infrastructure sector.   Schedule over run leads us to another major problem called “Cost escalation”FACTORS INFLUENCING MARKET PRICEAs we know from the above information i.e.

., delays longer than 3 years result in fluctuations in market price of many goods and services.Factors influencing market price are:Increase in Transportation chargesIncrease in electrical charges Increase in labour cost charges Increase in equipment charges Increase in lending rate for various SSI sectorIncrease in VAT and other service taxesIncrease in fuel cost  Due to all these factors cost overruns bid price  and at some point the company has no enough funds for further execution of the project and to start tolls to repay the debt issued by various national and international banks and the debt piles up. As soon as the project execution halts the company receives a Termination Notice from NHAI. In response to the termination notice companies request for some extension. To prevent the company from receiving permanent termination notice regarding the projects all the lenders meet at Joint Lenders Forum (JLF).

JLF tackles stressed loans but the progress is “SLOW”. Under the stressed asset norms of RBI, as soon as interest payments on a loan are delayed by 60 days a JLF comprising all lenders must be put in place and within 45 days, the JLF must come up with a corrective plan and decide whether the debtor merely needs some hand holding. or if the forum should opt for debt restructuring or recovery.The real problem with JLF has been the fact that the committee is not really empowered to execute a decision and as a result good and healthy projects are getting affected. Moreover big lenders do not co operate with the smaller ones and a lack of co ordination leads to failure in revive if projects. In case if Corporate Debt Restructuring (CDR) is invoked:As we know this scheme has not been successful so far. There has been a growing failure rate.

Of overall 530 cases approved, 228 cases have already failed. This clearly states the failure rate as 43%.Methods used in Corporate Debt Restructuring:1)      Reducing the rate of interest 2)      Conversion of debt to equity3)      Converting un serviced portion of interest to term loanThe ideology behind CDR was, as long as the assistance is provided to such companies which had become substandard assets /non-performing assets, granting CDR will help the company to become more financially viable which might help the company in executing the projects and recover its profitability.Ø  THE KEY REASON’S FOR FAILURE OF CORPORATE DEBT RESTRUCTURING:”The short tenure of restructuring that fails to match up with the longer development life cycle of infrastructure projects” .In CDR 2 years of moratorium + 8 years of repayment schedule has been put.This will give the company some breathing space in terms of executing the project and bringing back some liquidity back to the business.

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