Price Concerns Could Derail Infrastructure Projects

 

Over the last few years, we have seen an unprecedented rush of announcements on developmental projects in the infrastructure sector, be it power, housing, railways or roads. Every buoyant sector in the infrastructure segment received renewed attention from the investing community, not only from India but also from abroad. New joint ventures were created to develop infrastructure and even new sector-specific mutual funds came into existence to help mobilise funds for this upcoming sector. IPOs relating to this sector were oversubscribed on the very first day.

But the unexpected rise in inflation to above 12%, for whatever reasons, has brought about a sea change. Despite persistent efforts, we are still unable to tame inflation, though monetary tightening has adversely affected growth. Already the buzz is that GDP growth for the current year will be 8% or less. While in some cases, a brake has been applied on the pace of developmental projects that have been already been initiated; in other cases, new projects are being put on hold.

This is because the increase in costs renders astray all earlier calculations. At the outset of a new project, a detailed project report is prepared to assess the total cost of a project, define the gestation period and predict recovery of project cost, along with a projection as to when investors or promoters will start getting dividends on their investments. Project reports also estimate capital requirement, define the sources of funds, and, in some cases, even draft the memorandum of understanding with funding agencies that are willing to participate, be it as an investor or in the form of equity or loans.

However, inflationary trends have put a big question mark on all these estimates and derailed not only the pace of development of these sectors, but also the sentiments of investors. And this is the situation today, with investors wanting to distance themselves from these sectors as fears of an imminent slowdown gather more strength.

RBI’s action to squeeze the financial market has not only made the arrangement of funds for projects difficult, but has also pushed the rate of interest to higher levels. The input cost of capital has risen so sharply that even big corporate houses have started revisiting their projected cost of capital commitments and a process of rethinking has already started to reassess the viability of the projects that are at an initial stage or have not taken off so far.

The effect of inflation was also experienced in input materials, which are essential for the completion of these projects. The prices of cement and steel–being the most vital inputs for all infrastructure projects–have increases by 31% and 12%, respectively. Aluminum, copper and zinc, the most vital raw materials for any power project, have seen a steep rise in their prices during the last year. The prices of aluminum increased by 17%, zinc by 46% and in copper by 99%. To add to this, the unexpected and unpredicted three-fold jump in international crude prices in one year has played havoc with transport costs.

Consequently, the growth of core infrastructure industries, which averaged 8% in the first five months of 2007-08, has come down to 6% in the corresponding months of the current year.

Apart from current production, future supply would also be curtailed if inflationary trends persist and infrastructure projects are delayed, leading to cost overruns. And meeting targets may become increasingly unviable.

A slowdown in the pace of infrastructure is best avoided, as the adverse impact of such lapses will be felt on the economy for a long time.

DILIP K RAINA –Chartered Accountant

B.Com; FCA (ICAI); PGDFM; PGDCA; DBM; Cert. IFRS (ICAEW); Microsoft Certified IT Professional: Application for Microsoft   Dynamics NAV.

The Financial Express

http://www.financialexpress.com/printer/news/353129/

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