For the past several years India's infrastructure industry has remained hopeful that, after a brief surge when it seemed possible that the private sector could invest in infrastructure funds and then would begin the building of all the roads, bridges, airports and power stations that the country so desperately needs. The government insists that the surge wasn't a fluke and that the investment in infrastructure will continue. But this newfound wave of investment in infrastructure is on very shaky ground. Here's what's been happening:
Economy Slowing Down
Despite the government's attempt to paint a sunny picture for the future of infrastructure companies in Mumbai and the rest of the country, the reality is that the economy is slowing down. Economic growth has slipped below 7% amid growing debt at infrastructure firms (which usually build, operate or own projects, or a combination of the three, sometimes in partnership with the state).
This uncertainty and economic stagnation has caused a great deal of concern. First, new business has all but ground to a halt. Some of the biggest infrastructure and engineering firms have seen profits increase only slightly.
Cash Flow Is Tight
Infrastructure companies in Mumbai and the rest of India get paid when they start a project and when they reach various milestones towards finishing it. Banks and investors are now reluctant to hand over more funds. And the government is not reaching out to help. Add to all this concerns about long-term profits. At the time of the boom, firms bid recklessly for contracts. Now with high interest rates and inflation many of these deals could end up falling through. Even some completed projects are losing money.
Individual projects -- an airport, road or power plant -- are normally placed into special-purpose vehicles which in turn issue non-recourse debt. Infrastructure firms have several kinds of links to these vehicles. When they enter them in their accounts they may choose to consolidate them on their balance-sheet, or, if they do not control them, act as if they are investment funds.
Firms may also lend money to projects they have no money invested in and to contractors. They invite minority investors to come in on the deal at multiple levels in their holding structures, including private-equity funds that may finance their purchases by using debt.
This is rapidly becoming a financial mess and it endangers Mumbai's growth prospects as well as those of India itself. Infrastructure growth is vital. So two things must happen to improve the situation. The government has to work toward getting stalled projects moving again. And infrastructure firms have to raise a lot more equity instead of debt.
Article Directory: http://www.articletrunk.com
Jake Hyet is an expert on infrastructure funds and infrastructure companies in Mumbai having lived in Mumbai and worked in the infrastructure investment field for 10 years. He writes extensively on the Indian infrastructure system.
Please Rate this Article
Not yet Rated