Uncertainties Increase Concerns for Investors in Infrastructure Projects
The rupee fall has already made private equity investors vary of investing in the Indian real estate industry at the present moment. The country’s infrastructure scenario too is affected due to the economic downturn. Along with this, growing uncertainties may have increased the concerns of foreign investors who have invested in infrastructure projects in the country.
Effects of rupee fall on infrastructure projects
The rupee fall has not only affected the real estate industry in India, but also the infrastructure sector. Costs of several projects around the country such as Mumbai metro, Navi Mumbai Metro have gone up. Some multi-million dollar projects have seen almost 10% increase in costs translating to an increase of several hundred crores. Some projects were already affected and had come to a stand still due to various problems. The falling rupee added fuel to fire. Moreover, certain reforms that were planned are taking time to implement. Uncertainties have grown in the past one year increasing investor concerns.
Challenges for the infrastructure sector
According to Mr. Wilfred Aulbur, Managing Partner of Roland Berger Strategy Consultants, the Indian infrastructure is seeing tough times. Infrastructure sector are facing certain key challenges related to land acquisition, debt funding from banks and environment clearances. Access to funds from banks are limited since the banks are reaching their lending limits. Interest rates do not seem to come down in the near future. Moreover, there have been delays in land acquisition and environmental clearances, cost overruns and scope of projects. This increased risk makes it difficult to gain bank loans. Private equity firms are already facing a tough situation due to the slow economy, Hence, equity finance is almost impossible.
Another challenge for the infrastructure projects in India is that though there is 100% FDI allowed, there are a handful of foreign players. They have already secured many projects and cannot take up anymore. The fall in GDP to has affected the revenues of infrastructure projects.
Turnaround for infrastructure sector
According to Mr. Wilfred, the short term outlook for a turn-around is not positive. Challenges with liquidity and funding are structural issues. Hence, a significant policy is necessary to sort this challenge. However, medium to long term prospects are sure to improve if proposed reforms are implemented. Most infrastructure firms will resort to asset disposal to solve the pressure on funding, till they start making profits. Improvement in investment climate and growth rate can also help the infrastructure sector to make a turnaround.
