Friday, February 11, 2011

Governance issues impacting infra sector

Infrastructure stocks have been bruised and battered post their third quarter numbers. According to Vinayak Chatterjee, chairman of infrastructure and engineering consultancy firm Feedback Ventures, concerns relating to governance have been impacting the sector. “It has nothing to do with the order book. It has little to do with pace of execution. It is all about a negative sentiment on the entire governance structure that is required for infrastructure to go positively,” he felt .

Chatterjee said he expects order inflows from the National Highways Authority of India (NHAI) in about one-month’s time. “We have seen resurgence in urban transportation,” he informed.

Below is the verbatim transcript of the interview. Also watch the accompanying video

Q: What is the problem with the sector, all investors seems to be loosing faith in that sector suddenly. Is it just high interest cost etc or is something basically going wrong with execution and awards in this space?

A: The fundamental issue right now for the lack of positive sentiment is bunch of governance issues. Issues which are related to land, environment, transparency of handing out contracts, issues of relationships between different wings of the government. If you ask me to put my finger on what is affecting sentiment, it has nothing to do with the order book, it has little to do with pace of execution. It is all about a negative sentiment on the entire governance structure that is required for infrastructure to go positively.

Q: Which vertical is it hurting the most because the well documented one is how NHAI projects have just ground to a halt but which sectors or which parts of this infrastructure space do you think are hurting the most?

A: Your point about NHAI is correct and it has been quite some time when a fresh burst of projects have appeared from NHAI. What insiders tell me is that, hectic work is going on within NHAI and the ministry for the next wave of projects to be issued. So, in NHAI there is never a steady flow of projects, it comes in packets; it comes in burst with some hiatus in between, but this hiatus has been a fairly long one. So, on an optimistic note, I am told that within a month or so a fresh batch of reasonable thousands of kilometers are coming on to the market. So that should be some note of cheer for people in this sector.

Between you and me the issues on power, the power sector people will tell you that there is lot of action on the ground which does not catch the public eye. There is close to 60,000 megawatts of power projects under implementation right now which should do well for the 100,000 plus target for the 12th plan.

But the current issue in power is of course whole issues related to fuel linkages, coal, environment, forest, go, no-go areas and all of that. And the long-term issues are related to a common open market which is implementing the electricity act in spirit and making open excess happen.

There isn’t very much action on airports for the private sector because although airport work that’s happening now in the public domain, 35 non-metros. In ports there is sporadic activity, few very good private ports have got completed, some berths are getting privatized but there isn’t that ground sole of action in ports which leaves real estate, construction and urban infrastructure and urban transportation.

Urban transportation is picking up because city by city there is a resurgence of interest in different kinds of light rail transit (LRT), metro rail transit (MRT), Monorail etc and that’s a sector that’s likely to see a lot of action ahead. With L&T having one implementing the Hyderabad metro, there is a lot of private sector interest getting into this space. That’s a broad overview.

Q: What about financing? That’s the other area which a lot of people are concerned about this year because interest costs are going up, that’s not good news for the BOT type players and the stock market has closed out a little bit for these companies making equity capital or access to it quite difficult. Do you foresee any execution risks because of financing issues this year?

A: There are two levels of financial risks. One level of risk is related to availability of Capital and financial closure of projects. The other is the cost of finance which affects the bottom line. So far as the latter is concerned, I think the markets, the infrastructure projects are financed for 30 years so across 30 years there will be ups and downs in the interest rates. So, I would ignore that portion of whether it in a particular quarter interest rates affect the bottom line or not.

But on the larger issue of availability of finance while there is no denying the fact that at the macro level it is well documented that there is an asset-liability mismatch on long term funds, but if you ask any individual promoter or if you ask even the financial institutions there is far more money chasing. And I have always said that there persists a situation where there is more money and finance chasing, a lesser number of bankable projects.

So the real issue is of course we have to address the long term asset liability mismatch. You have got talk of USD 11 billion or Rs 50,000 crore debt funds. You have got budget expectations of wholesome package for retail investors to invest in Infrastructure bonds. So all those issues are getting taken care of hopefully in a asset-liability mismatch.

But the real problem is that if you ask the PE fund managers, they will tell you that there is close to USD 40 billion of PE funds available right now for India across different pockets but there aren't enough projects for them to invest in. So, the real issue is lack of bankable projects. And we should focus on one issue it is how does India, how does this system, how does the sovereign churn out a larger number of bankable projectsSource: Governance issues impacting infra sector: Feedback Ventures - CNBC-TV18 -

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