Need To Improve The Investment Climate

K Ramchand,
Managing Director,
IL&FS Transportation Networks

In the past few quarters, the infrastructure sector has witnessed margin pressures. What time frame do you expect for an improvement on this front? 

Rather than margin pressures, we have been witnessing deal flow pressures in the past few quarters, mainly due to a weak macroeconomic environment. The delays in project clearance and high interest rates are building further pressure. 

However, the latest economic numbers give some hope for optimism and suggest a sustainable recovery in the coming quarters, which should gradually kickstart the investment cycle in the infrastructure sector. We expect the situation to improve by the second quarter of the next financial year. 

Though order inflows are good, the market has remained highly competitive and bidding has been aggressive. Do you see this pressure receding in the coming quarters? 

In fact, the contrary is true. Order inflow has been extremely weak, which has resulted from a host of factors. Aggressive bidding in the past couple of years has reduced the attractiveness of BOT projects. This has led to a weak sentiment about the sector. 

We have observed that there has been a gradual decline in interest from non-serious players in the case of PPP projects, probably due to the inability of those players to achieve financial closure. Going forward, we expect the pressure to reduce in the case of BOT projects, but the case may not be the same with the EPC model. 

While the domestic order book is improving at a slower pace, a few large companies have acquired international orders, though the margins are lower in the international markets. How do you view this situation? 

IL&FS Transportation, through its subsidiaries, has acquired international orders in the Middle East, Ukraine, Latin America, etc. From our experience, we believe that we can play a major role in developing infrastructure in these regions.

However, the bigger challenge has been to understand the pricing mechanisms to not just be competitive but also to make sure that the right workable prices are quoted to deliver best-in-class products. It is necessary that we take some time to understand each market and develop skills sets for participat- ing in bids and implementing the projects successfully with sustainable margin levels. With this exercise being done, we do not perceive losing out on profit margins while implementing the projects. 

The working capital requirements of infrastructure companies have increased in the past few quarters. With higher interest rates, the impact on the bottomline has been severe. What are your views on the same? 

The interest burden has gone up significantly in the past few years, from about eight-nine per cent to about 13-14 per cent. This is a concern for the infrastructure companies, as it is directly impacting the earnings growth as well as the net working capital. The bottomlines are flattish, even for those who have performed well on the topline front. A few companies have been selling assets to pare their debt, probably due to decreasing margins in a sluggish economy coupled with rising interest costs. In the current interest rate scenario, it will be really tough for many infrastructure players to sustain the investment momentum. 

Do you feel that declining commodity prices will have a positive impact on the sector? 

There is a general feeling that commodity prices have started declining gradually. However, with reference to the roads sector, the prices of key inputs have not gone down significantly. In the case of bitumen, the prices have gone up by 22 per cent in December 2013 corresponding to December 2012. As regards steel, the prices are more or less the same as they were last year, and same is the case with cement. If the prices decline going forward, this should have a positive impact on the sector. 

The government has taken some steps to speed up the reforms process and for fast-tracking a few infra projects. Do you feel this will help the infrastructure sector to get back on track in the near term? 

By fast-tracking the PPP infrastructure projects which have been struck for very long, the government is making an attempt to ramp up the investor sentiment. This should ideally bring in investments and get the sector back on track in the near term. 

Land acquisition and environmental clearance have been the most important issues faced by the sector in the recent past. Do you expect any respite on these counts? 

The major issues faced by the roads sector were delays in environmental clearances, land acquisitions, shifting of utilities, flaws in the initial specifications of projects, etc. The new policy measures introduced by the government are attempting to sort some of these issues and revive the investment climate in the sector. The policy measures should ideally bring respite by improving inter-ministerial co-ordination and reducing inordinate delays. 

What are the reforms that you feel are likely to help the infra sector to regain its glory? 

Foremost, we will have to improve the investment climate for the infrastructure sector. The key to successfully raising enough investment for essential infrastructure services will rest in finding the optimum balance between public and private money. 

So far, Public-Private Partnerships (PPPs) have attempted to manage the funding gap and use the techno-managerial efficiencies of the private sector to prevent the inefficiencies prevailed in the system. Considering the Indian government’s budgetary resources, PPPs are inevitable. They provide end- users with adequate, safe, efficient, reliable and reasonably priced infrastructure. 

The government should ensure an appropriate regulatory framework and provide an environment suitable for both businesses and end-users. In my view, we have made sufficient reforms except for dealing with disputes. 

What are the other positive triggers for the infrastructure sector that you expect in the near-to-medium term? 

Dalal Street may be happy with a rate cut, but we are not expecting the same in the near term. A positive trigger for the sector could be immediate policy action to address the financial and institutional constraints faced by the market participants.