Certainty & predictability of cash flow to attract investors into infra projects, says former Deputy MD of SBI

The government has released Rs 102 lakh crore blueprint for infrastructure development. The national infrastructure pipeline will give top priority to energy, roads, urban development and railways in 5 years. The budgetary spend for infra will now go up from 0.83 percent of gross domestic product (GDP) to 1.1 percent of GDP by FY25.

“It is indeed a laudable effort to collate all the projects both in the economic and the social sectors which are available. They have also recognised why most of the infrastructure sector projects have gone beyond cost and time overruns and the reasons for that. Their stated objective to monitor the projects towards implementation is also very laudable. However, the fact of the matter is that these have been known for quite some time. We now need reforms at the ground level to ensure that contracts are enforced and the dispute resolutions don't get into loop of arbitration awards," said Shrivastava.

“What would inspire the confidence for participation from the private sector including funds from outside would be the certainty and predictability of cash flows. That needs to be addressed and I am sure this would be having the attention of the Task Force and probably they would be working on it but that would be most important,” he added in an interview with CNBC-TV18.

When asked if funding was a problem, Murthy said, “Funding is definitely a problem these days even for engineering, procurement and construction (EPC) companies particularly in terms of bank guarantees and LCs. When the government agencies award a contract, at least 25 percent of the project value has to be provided by way of bank guarantees like performance guarantees etc and many of these guarantees run for a long period."

" Now banks are very reluctant to provide these long-term bank guarantee limits for various construction companies and private sector banks look at it as a big risk and they are not at all participating. While public sector banks have already got a big exposure to many of these companies and they don’t want to add to that exposure. So this is a big problem," said Murthy, adding that this kind of EPC execution to take place a good support form banking system is badly required.

Meanwhile Rai said, “The payments are an issue and there are certain delays but then what banks are doing for the good construction companies, we have given a line of credit, working capital, the guarantee limits. So, we are not seeing that much stress in the good construction companies. There are delays but by way of working capital, we are able to cover up that. We have not seen that much problem in the projects that have come over the last two years, the executions are all on track,” Rai further mentioned.

Talking about trust deficit and the ways to bridge it, Rai said, “We need to understand that most of these EPC companies earlier went through a lot of crisis and the recovery from these EPC companies are very low even through the National Company Law Tribunal (NCLT) process. So, the risk department of the banks are a bit averse in clearing the proposals of the construction companies."

"However, at the same time, we have differentiated the good construction companies, we have a big list of construction companies where we have no problem. In last two years whatever HAM projects have come up, the financial closure has happened in every company, in every project. So we are not hesitant but yes they go through some enhanced due diligence,” Rai added.