Restructuring stalled infrastructure projects

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.

Should you worry about the market's current volatility?

By Larissa Fernand |  11-05-15

The stock market has been volatile. Should one follow the dictum: Sell in May and go away?

Indices tumbled during the week but picked up on Friday. In the midst of such volatility, investors tend to question whether or not it is the right time to get into the market or out of it. But frankly, they are asking the wrong question.

Such questions are based on the presumption that they can enter the market and exit at the right time. Let’s get this straight, this is much easier said than done. Look back at your own track record. You may be boasting about the fact that you did not invest in 2007 when the market was on a roll. But did you enter the market a couple of years before that when it was at a low? Did you buy stocks immediately after the dot com crash? In 2008, when stocks were available at dirt cheap valuations, did you buy?

That’s the double-edged sword of market timing – it’s not just about skipping the market highs; should you miss a crash, you miss riding the recovery that follows.

Not too long ago, in October 2014, volatility hit the Indian market begging an answer to the same questions raised today. The reason at that time was more global - a likely recession is Europe, compounded by slow economic growth in the U.S., fear over the spread of Ebola, and geopolitical hazards. VIX (Chicago Board Options Exchange’s index of volatility) hit its highest level since late 2011 and the India VIX Index also jumped. But we got through that phase.

Don’t forget the hit that stock markets across the globe took in 2011. Financial Times reported that global stock market capitalisation dropped 12% that year. The Indian market did not escape unscathed. The Sensex ended the year at 15,454. By April 2, 2012 it moved to 17,478 only to drop to 16,546 by May 8, 2012. Yet the annualised 3-year Sensex returns (as on May 8, 2015) are 17.88%

The point is that if you ignore market upheavals and stay the course, you end up making money.

If you want to be successful in the stock market, stick to your guns and don’t deviate from your investment plan. A successful investor is not one who accurately predicts the direction of the markets. To do so you would have to either be an astrologer with a very high success rate or God; chances are that you are neither. Stick to basics, which means you need to ignore the distractions and the desire to give way to your emotions and behave rationally.

I had started off by saying that investors are asking the wrong questions. What are the right ones?

The right questions should pertain to your portfolio. Are there any funds whose volatility is giving you heartburn? Then you could consider eventually dropping them from your portfolio. Have you reached your goals? For instance, if you were saving in an equity fund towards the downpayment of a house and you need to make the purchase soon, it would make sense to move that money out of equity now. Or, is it that you have a better alternative investment in mind? Do you want to invest in some property that is available for a song? Then you could consider offloading your stocks to finance this investment. Base your decisions on your goals and capability for risk. Not on the volatility of the market.

On a lighter note, the entire saying is "Sell in May and go away, don't come back till St Ledger Day" and its origins are not Wall Street, but London. Summer sporting events were considered major events and the St. Leger Stakes was the oldest of England’s five horse racing classics and the last to be run in the year. The rick folk who traded were distracted with the social events and volumes would plummet in the summer months, leaving share prices flat, falling or at least volatile.

The reasons for volatility now are very different, though an abbreviated version of the phrase is still thrown around.

SOURCE : MORNINGSTAR.IN

Buy India Infrastructure

It has gone up relentlessly for the past year. But the fears of Fed rate hikes have died on slow economic data.

Over the past two months, UPP has put in a lower high and a lower low. This pattern is called a flag formation, which suggests consolidation or reversal.

Don't get me wrong — it could move higher here based on slowing growth in China and the possible Greek exit from the eurozone. But at the very least, the uptrend is broken, and you can expect choppier trading from here.

Simple, Two-Part Investment Tool

At times of extreme currency speculation, I use a simple investment strategy that has paid off handsomely over the years: I find the most undervalued currency located in the fastest-growing economy and buy equity in it.

Step Two

The second step is to find the countries that are growing with low inflation. According to the back page of The Economist:

• Egypt has a GDP growth rate of 4.3% with consumer price change of 11.5%.
• Indonesia is growing at 5% with inflation at 6.4%.
• Poland is at 3.1% GDP with a negative 1.5% consumer price change.
• Malaysia is growing at 5.8% with a 0.9% consumer price change.
• India is growing at 7.5% with a 5.2% consumer price change that is dropping — down from 8% last year.
• Russia, Ukraine, and South Africa are declining or growing marginally with rapid inflation.

As investors, we are seeking a discount for value, as well as low inflation and high growth. Looking just at these numbers, Malaysia has the best bang for the buck.

That said, it is a major hydrocarbon exporter, and the trend is against it. With an oil price glut, the upside goes to countries that import oil.

This leaves you with India and Egypt. Egypt could be a buy.

But I like India, and I'll tell you why...

Buy India

India is the world's largest democracy that just voted in pro-business leadership in the form of the Narendra Modi government. It is arguably the first pro-business government in India's post-independence history.

Furthermore, India is a major beneficiary of low oil prices.

According to Bloomberg:

...the 55 percent drop in Brent since June to below $50 a barrel is a gift that could give Prime Minister Narendra Modi the room needed to step up infrastructure spending as he prepares the 2015 budget. He estimates the drop in crude is saving India $5 billion a month. The International Monetary Fund added to the euphoria earlier this week by forecasting India will become the world’s fastest-growing major economy by March 2017.

Boom Away in Old Bombay

The IMF recently came out and said that India's gross domestic product is likely to grow at 6.3% (marginally down from the 6.4% projected in October) in the next fiscal year and 6.5% in the year to March 2017.

The Indian Finance Ministry was even more bullish and said GDP could hit 8.5% this year.

The World Bank has echoed this idea and said that India's growth will eclipse China's by 2017.

Part of this is due to a slowdown in China, and part of it has to do with the slow and chaotic muddling through of the Indian economy. India has a lot of problems, but a centrally planned economy isn't one of them.

Totalitarian states can get the trains to run on time — for a while. But nothing beats a free market democracy for price and demand discovery. It looks like a mess, but it works.

India has been slowly (and I mean slowly) opening up its markets for the past 20 years. With the new government, change is accelerating, and the payoff is here.

The new government is spending money on infrastructure, cutting red tape, and reducing interest rates. The government plans on increasing infrastructure spending from 6% of revenues to 9% with five ultra-mega power projects, as well as new tax-free bonds for roads, rail, and irrigation.

I've recommended following Funds to own

1. Franklin Build India Fund (G)

2. Kotak Infras. & Eco Reform -  (G)

3. Can Robeco Infrastructure (G)

4. Religare Invesco Infra. - (G)

5. Reliance Diver. Power - RP (G)

based on general growth. 

Forbes writes:

...developing Asian countries have an infrastructure demand of about $8 trillion over the ten years to 2020, including $2.5 trillion for roads and railroads, $4.1 trillion for power plants and transmission, and $1.1 trillion for telecommunications, and $0.4 trillion for water and sanitation investments.

Buy it.

All the best,

Ritesh.Sheth CWM^®

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Sensex year-to-date returns turn negative

Nearly a year into Narendra Modi’s rein, the Indian equity market is no longer the story it was. The  benchmark S&P Sensex, up as much as eight per cent at one point during the year, has seen its entire 2015 gains erased.

After two weeks of losses, the 30-share index on Friday ended at 27,437.94, slightly below 27,499.42, where it started the year. The index had risen as high as 29,681.77, an all-time closing high, on January 29.

With the economy showing little sign of acceleration, the monsoon likely to remain deficient and corporate earnings expected to stay subdued for some more quarters, analysts fear the Indian market could slip further.

Worryingly, foreign institutional investor (FII) sentiment towards the market has turned negative over tax uncertainties. Excluding inflows on account of the $3-billion Sun Pharma share sale, FIIs have been net sellers by almost $400 million so far this month. Since 2014, monthly investments by foreign investors have been negative only on two occasions.

Also, India is the only major market to have slipped into negative territory in terms of year to date returns. Meanwhile, most European markets are up 20 per cent, China is up 30 per cent and the US market is up about two per cent.

“The factors responsible are all local,” said G Chokkalingam, founder, Equinomics Research & Advisory. “Selling by foreign investors, weak monsoon forecast, the retrospective tax issue, poor corporate earnings—all are together hurting the market.”

Experts said investor sentiment has been hurt by notices served by the income tax department, demanding payment of Minimum Alternate Tax (MAT) on investment by FIIs in the past few years. Nirmal Jain, chairman, IIFL Group, said investors want the tax uncertainty to end and the government should act swiftly in resolving the MAT issue.

“We need foreign investment, so we need to boost their sentiment and create an easy, welcoming and participatory environment for them,” he said.

The other major stock benchmark, the 50-share Nifty on the National Stock Exchange, after dropping close to 3.5 per cent, ended at 8,305, the lowest since January 2014.

“So far almost eight of 10 companies have posted disappointing results. This has been another key issue weighing on the market,” said Chokkalingam.

Investors have been spooked as several blue-chip stocks — including ICICI Bank, State Bank of India, Sun Pharma and Hero MotoCorp are down as much as 20 per cent from their 2015 peak.

“We see potential correction (fall) in the high-growth quality stocks if investors start questioning the Street’s earnings assumptions. Even with a 15-20 per cent correction, valuations would remain heady,” wrote Sanjeev Prasad, senior executive director & co-head, Kotak Institutional Equities, in a recent note.

After the recent fall, the Nifty trades at around 15 times its estimated one-year forward earnings. The valuation is still above its five-year trading average of 14.3 times and also is expensive when compared to the trading multiple of around 13 times for the MSCI Emerging Markets Index.

Recently, foreign brokerage UBS cut its year-end price target for the Nifty by four per cent to 9,200 for the Indian market, citing slower than expected recovery in corporate earnings.

The declining capital intensity and secular stagnation

The declining capital intensity and secular stagnation

Barry Eichengreen (via Mark Thoma) examines the various explanations for secular stagnation,

Four explanations for secular stagnation are distinguished: a rise in global saving, slow population growth that makes investment less attractive, averse trends in technology and productivity growth, and a decline in the relative price of investment goods. A long view from economic history is most supportive of these four views. 

The same investment projects can be pursued, it is hypothesized, by committing a smaller share of GDP, and any additional projects that might be rendered attractive by this lower cost of capital are not enough to offset the decline in the investment share. With less investment spending chasing the same savings, the result can be lower real interest rates and, potentially, a chronic excess of desired saving over desired investment.

He has this graphic which highlights the declining relative price of investment goods. 

While this may be true of many developed economies, where the services sector predominates, it may be less so with developing economies. In these countries, manufacturing still makes up a significant share of the GDP and services a less dominant one. This is one more reason for appreciating the international dimension of secular stagnation hypothesis. Once we assume an open economy, the potential for mutually beneficial outcomes from international trade and cross-border capital flows are immense. 

India and the AIIB

India and the AIIB

Last week the Chinese government announced that 57 countries, including India, have agreed to join the Asian Infrastructure Investment Bank (AIIB). The process of preparing the institution's shareholding pattern, governance framework and lending rules will soon start. So what should be India's strategy?

Foremost, India should realize that it is second only to China in all the parameters - GDP, population, actual infrastructure investments, financing needs and so on. But the politics and economics of joining AIIB pulls in different directions for India. 

Politically, it is undoubtedly in India's interest to not to be not part of the founding of an institution which now holds some global geo-political significance. India should aspire to a seat at the top of the table in an institution that has the potential to become one the leading multilateral financing institutions. But economically, India could well stay out of AIIB and not lose much. Its infrastructure investment needs are massive, nearly $ 1 trillion targeted for the 2012-17 period. The AIIB's contribution can, at best, be just a drop in the ocean. In fact, given its modest initial capital ($50 bn) and the perception discount (among investors and countries) associated with an institution that is clearly dominated by China, one could argue that economically the institution would benefit more from India's presence than India would. It is therefore safe to argue that the AIIB needs India atleast as much as India needs AIIB. India needs to leverage this to its advantage as it negotiates the Articles of Agreement (AoA) of the AIIB. It should not become just another invitee to a Chinese triumphal party.

Given the deep Chinese interest in displaying how the new institution will be fairer and more equitable than the Bretton Woods twins, India has the opportunity to play ball with China over negotiations on the AIIB's governance framework. Furthermore, given China's dominance in AIIB (its initiative, headquarters, leadership position etc), a framework which is fairer and more equitable than the Bretton Woods institutions would involve considerable sacrifices by China and gains for countries like India. 

Apart from the limited financing opportunities, what should be India's possible takeaways from an AIIB? 

1. India should push the AIIB away from multilateral sovereign lending and towards project finance lending. A country like India should have limited interest in sovereign loans and should be more concerned about using all potential sources to leverage international long-term capital to finance its, predominantly, privately financed infrastructure projects. For example, like with the case of World Bank and IFC, even a small AIB share in a project could serve as a credit enhancement and help crowd-in international capital at lower cost than otherwise. 

2. India should advocate issuance of bonds by the AIIB in not just dollar and renminbi (as is most likely, since China would not lose this opportunity to promote the renminbi as a reserve currency), but also rupees. This would help in the internationalization of the rupee as well as help Indian borrowers more cost-effectively hedge their losses and thereby lower the cost of their foreign capital. 

3. India should strive to use the AIIB as an instrument to promote the interests of its own infrastructure firms. It should not be a surprise if China uses the cover of AIIB lending to promote contracts for Chinese firms. There is a strong likelihood of this given the perception that China could use the AIIB to formalize the massive lending currently being undertaken by institutions like the China Development Bank, all of which are conditioned on awarding contracts to Chinese firms. In that case AIIB could become an extended arm of Chinese aid diplomacy. Instead, India should negotiate hard to ensure a level-playing field for Indian firms.

4. The bonds issued by the AIIB could be a potentially good source of risk diversification as well as earning higher returns for India's growing foreign exchange reserves, a large share of which are currently invested in low-yielding US Treasuries. In fact, India should use its reserves and unilaterally match any Chinese contribution either by subscribing to bonds or equity capital. 

India real estate market fact of the day

India real estate market fact of the day

From Livemint, adding to the long list of badly indebted corporates, comes debt-laden property developers, whose problems are exacerbated by unsold inventory,

At brokerage Kotak Securities, analysts estimate unsold inventory held by a group of leading Mumbai developers alone now stands at some Rs.53,400 crore—with an additional Rs.36,800 crore of project launches in the pipeline. That puts the current, unsold area in Mumbai at almost the value of the total sold in the 2014 calendar year. The backlog, analysts estimate, could take more than a decade to clear... It now takes developers about four-and-a-half years to turn property inventory into cash, more than a full year longer than it takes developers in China, according to Thomson Reuters Starmine data.

Another article points to a study by Knight Frank India which highlights the large volumes of inventory piled up across the largest cities. For example, in Delhi, even if no more properties are added to the market, the current inventory will take about 14 quarters to be sold.

However, this glut, mainly at the middle and upper end of the market, stands in stark contrast to the severe shortage at the lower middle income and lower income level (Rs 5-20 lakhs) markets. This trend points to a market failure in the housing market, demanding public policy action