Monday, May 4, 2015

Restructuring stalled infrastructure projects

The massive numbers of stalled infrastructure projects constrain India's economic growth on multiple fronts. Apart from preventing downstream economic activity (even sunk investments), it acts as a huge drag on the balance sheets of infrastructure firms and lending institutions. The Economic Survey has an analysis of such projects. Here is a graphical illustration of the magnitude of the problem.

The decline in new investments coincided with sharply rising volumes of stalled projects since 2009.
A high-level Project Monitoring Group (PMG), established mid-2013, was entrusted the responsibility of de-clogging 437 major stalled projects (342 with investments above Rs 1000 Cr) worth Rs 21 lakh Cr (or Rs 21 trillion). The sector-wise projects break up reveals that power, steel, and petroleum and natural gas make up Rs 17 trillion of these projects.
The Department-wise break-up indicates that Environment and Coal Ministries made up 60% of the projects.
In late-2014, the Planning Commission presented to the Prime Minister that an additional Rs 5.7 trillion would be required to complete 738 central government funded infrastructure projects on which already Rs 5.6 trillion has been expended. It also said that 83% of these projects were delayed, resulting in cost over-run of Rs 1.89 trillion. Interestingly, 274 out of the 289 railway projects were delayed, mainly due to financial constraints.
The delays with railway projects are surprising since many of them involves gauge conversion or additional lines, which have limited land acquisition requirements. Financing problems and equally importantly, implementation inefficiencies and contractor delays, are likely reasons for the delays.

In March 2015, the Ministry of Statistics and Program Implementation placed details of these 738 projects being monitored before the Parliament. It stated that 315 of these projects had passed their implementation deadline. Road Transport and power formed nearly half these projects and railway projects formed eight of the ten most delayed projects.
As to the major reasons for the delays, an HSBC study of the top 100 largest stalled projects in the CMIE records found that site acquisition make up a third.
In contrast, another analysis of stalled projects, based on data for 804 such projects provided by the Ministry of Finance, appears to contradict the claim that land acquisition problems are holding back projects. The MoF data informs that just 8% of the projects are stalled due to land acquisition problems and 39% are due to unfavorable market conditions. Interestingly, the reasons for delays in about a third of the stalled projects is unclear.
There are significant variations across sources about the reasons for delays. It is clearly not as simple as the conventional wisdom that land procurement and environmental clearances have derailed many of these projects. My own belief is that a large numbers of these projects were initiated without rigorous due diligence and at a time when credit was easily available. Therefore, commercially unviability may be the under-stated real contributor to delays in the majority of cases.

Even assuming expedited clearances and site procurement, itself no mean task, given the delays that have already happened, those projects too would undergo cost-escalation. In the circumstances, there are only two solutions - restructuring or scrapping. The former assumes that the project can be salvaged by changing its terms.

Such changes in terms can potentially come in three forms. In purely private projects - steel, telecoms, petroleum, manufacturing, real estate etc - the developers should find the present market conditions commercially viable enough even with the increased investments required. In infrastructure projects - power, roads, railways, mass transit etc - the governments should finance the cost-escalation either by agreeing to pass-through some of the costs (through higher tariffs or tolls) or provide budgetary support for the increased expenditure. Finally, in certain cases, especially roads where traffic forecasts were optimistic, it may be possible to restructure the project merely by increasing the project tenure and without any additional financial burden.

This assessment in turn critically depends on the sunk investments made in those projects. In projects where significant investments have already been made, restructuring becomes more likely, whereas those where investments made are marginal, developers may prefer to wait out or scrap the project.

It may be necessary to carry out detailed analysis along these lines before we embark on any restructuring of projects. If the developers of purely private projects find them commercially unviable given the prevailing market conditions and government is in no position to bear the fiscal burden, then the possibility of restructuring diminishes dramatically. In that case, all talk of restructuring stalled projects is barking up the wrong tree. In that case, scrapping becomes the only alternative. 

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