'Core projects foreign lending faces hurdles'

Delays in land acquisition, construction risks are among the major constraints for flow of foreign investments into infrastructure projects, said a report by Moody's Investors Service and ICRA Ltd.

According to estimates, India needs more than $300 billion over the next five years to support infrastructure projects and rapid GDP growth. The report stresses on the need for India to develop its domestic capital markets as the primary source of long-term infrastructure funding and address some of the fundamental risks.

"While project financing is emerging, and there appears to be increasing interest from foreign lenders, actual provision of foreign currency debt has been relatively limited other than in some large projects with strong sponsors and foreign currency revenues," says Chetan Modi, Moody's Representative Director for India.

Modi says the constraints in attracting foreign investors, "include the generic difficulties existent in emerging markets over use of long-term foreign currency debt to finance projects that generate local currency revenues. Furthermore, foreign lenders - with more choices over deployment of capital may want more protection than Indian lenders would demand to mitigate project risks.''

"Delays in land acquisition (as well as obtaining environmental clearances) are likely to remain among the main reasons why the level of infrastructure development in India may not meet expectations,'' states the report.

"A particularly acute risk in India is land acquisition. A variety of political interests may act to frustrate the process. Project agreements typically allocate this risk to the government. However, projects may still default as their liquidity is drained during delays, or if the government does not provide compensation on a timely basis and in the absence of any other cash flow,'' added the report.

Uncertainty of completion of project, lenders' ability to implement remedies for projects not performing as projected, the risk of failure by government bodies to deliver on their contractual obligations, and the credit quality of key project counterparties have been cited as some of the other concerns.

With particular reference to power projects, the report states, "Although the move to competitive bidding has many benefits, it can also present additional risk issues over the long duration of project agreements, when selection is based essentially on the lowest-priced bid."