Risks associated with lengthy and uncertain land acquisitions, environmental clearances as well as foreign currency risks could stymie funding of India’s infrastructure projects by foreign investors, says global rating agency Moody’s Investor Services and its domestic associate, ICRA Ltd.
In an assessment of risks facing potential foreign lenders in the infrastructure arena, the report suggests that the government would do better to mitigate them through structural reform, as well as urgently developing a local long-term debt capital market.
It also argues that the plan to use foreign currency reserves for such projects is a non-starter as it would only expand government debt.
Moody’s also finds that switching to the competitive bidding process in power, as opposed to the negotiated bidding, which led to the failure of many independent power producers in the 1990s, is not without risks in India.
For one, the preference for lowest price may prompt less-robust projects getting through.
Secondly, the lack of transparency in bidding parameters may lengthen the process, just as it has happened in the case of the Sasan ultra mega power project in Madhya Pradesh, where the lowest bid, from Lanco, is now under review after the original consortium underwent changes.
Since infrastructure lending is typically long-term and hence difficult for domestic banks to absorb, foreign project financing has become essential in India.
Of the $300-320 billion (Rs12,90,000-13,76,000 crore) of investment required over five years, the foreign investor could provide a maximum of 20%.
Of this $60-64 billion, the debt component would be about $45 billion and the balance would be in equity.
The Moody’s report clearly underlines that India’s expectations of getting $300-320 billion foreign direct investment in infrastructure is grossly optimistic.
Despite keen interest from foreign lenders, actual foreign currency debt for project finance is lower than expected —or even less than what has been available for oil and gas—in power and roads projects, which are not only smaller but also lack assured revenue flows.
The report says that this is due to rules and regulations that govern long-term foreign currency debt and the foreign lenders’ desire for increased protection against future risks unique to India.
The report identifies four main risks. They are completion uncertainty, made complicated by construction problems; government bodies not delivering on their contracts and promises; credit quality of key counterparties; and, lenders being unable to intervene if projects don’t perform as projected.
In addition, there is also the foreign currency risk.
Chetan Modi, Moodys’ representative director in India, says the government’s plan to create special purpose vehicles to utilize the country’s foreign currency reserves makes an “erroneous assumption that reserves are owned by the government”.
“They are really held by the Reserve Bank of India (RBI) for the foreign investors in the country, such as portfolio investors. Moreover, borrowing from RBI, even through a special purpose vehicle, only increases the government’s debt, even if it’s off-budget,” Modi notes.