Source: The Economic Times, Dec 03, 2019
NEW DELHI: India’s bid to upgrade its infrastructure is confronted by a new risk factor — contract cancellation or asking for reviews of big projects following change in state governments. This can be a significant risk for investors, market watchers said.
The latest example of a project risk following a regime change is from Maharashtra and the target is the ambitious Mumbai-Ahmedabad bullet train project. This follows contract cancellations for building a city in Amravati and renewable power projects in Andhra Pradesh.
Maharashtra CM Uddhav Thackeray, who heads a three-party alliance formed after polls to keep BJP out of power, has said he will review India’s bullet train corridor, a project started by the previous BJP government in 2014. He has also stayed the work on the Metro car shed project at Aarey Colony, a project that drew both green activists and court intervention.
In most cases, costs incurred by a contractor during the preconstruction activity is unaccounted for and turned into a loss if the project does not fructify.
“Apart from cost overruns and delays, such uncertainty causes an existential dilemma as to whether the project will come to life,” Vinayak Chatterjee, chairman at Feedback Infra said.
In case of public-private partnership (PPP) projects it directly hits the finances of contractors while in case of projects like the high-speed rail corridor which is being jointly funded by the Japanese government, proposed move may dent India’s bilateral relations that were built with considerable effort, say experts.
“Projects like the bullet train are funded by multilateral Japanese agencies and are mostly funded externally. So in that sense the risk for local lenders is less. But there are allied activities tied with these projects which may be impacted in case of review and this could impact future prospects of economic growth. But it is too early to say how this government will review these projects,” said a senior public sector bank official.
Pointing out that a stable policy environment is a prerequisite for drawing investors, Hindustan Construction Company chairman Ajit Gulabchand said, “You are creating this instability in regulation, you are removing the predictability. This is not conducive for any investments. If you want to bring it (foreign funds for big infrastructure projects) in, you have to create this environment.”
“Re-thinking, and cancellation in some cases lead to loss in financial capital, social capital in terms of services to citizens, political capital and economic, in terms of jobs and construction activity that the project would have otherwise created,” Chatterjee said.
Another example of investments being jeopardised due to political differences is that of YS Jaganmohan Reddy-led Andhra Pradesh government recently renegotiating power purchase agreements (PPAs) signed during the regime of Chandrababu Naidu of the Telugu Desam Party.
Besides re-negotiating power purchase agreements (PPAs) with renewable energy developers, the Andhra government led by Reddy also stopped procuring electric vehicles for government fleets from Energy Efficiency Services Limited (EESL).
“New governments not respecting their predecessor’s contracts is the single-biggest challenge that this country is facing. It is very childish to be honest,” a senior government official said, commenting on the development.
“There are two kinds of foreign investors who are currently suffering from zigzag approach in legislative changes in infrastructure space. One are investors and other are EPC players who are involved in such projects,” said Ranjit Prakash, chief executive partner, Archeus Law.
In July, the World Bank and Asia Infrastructure Investment Bank (AIIB) pulled out of the Amravati Capital City project in Andhra Pradesh after the Reddy government decided to review it.
“The change in the government increases financing risk because a review could delay the project and lead to cost overuns,” said senior private bank executive. Some large projects are funded by foreign agencies, but there is also a local component.
Lenders will not disburse the amounts sanctioned if there are delays, the executive said. “Also when foreign companies are involved there are force majeure clauses involved in the contract which allows these firms to review their funding in extraordinary events. All these things will have to be taken into account,” said a senior private sector bank executive.