Reliance Walking From Major Projects Reflects Market Risks
BMI View: Numerous factors dampening the construction market in India, such as structural weaknesses in the country's investment climate and project execution in the infrastructure sector being hampered by issues such as land acquisition and environmental clearances, has prompted major players to withdraw from badly needed infrastructure developments. We see these issues remaining over the medium term and as such we have recently revised our forecasts for the construction industry's real growth down to 7% year-on-year in 2013.
The slow pace of regulatory reform in the Indian construction market and the project delays that it subsequently causes have prompted Reliance Infrastructure to shed INR20,000 crore (US$3.6bn) of its infrastructure portfolio. This continues the trend which we have previously noted for infrastructure investors to be swayed against putting up badly needed money to upgrade India's poor infrastructure, due to uncertainty that projects will ever reach completion, or even get off the ground ( see ' Uncertainty And Stimulus Halts Nomura's Indian Infrastructure Ambitions', 16 January).
Speaking to The Economic Times, Reliance Infrastructure CEO Lalit Jalan said that in light of government failure to allow projects to progress, the company will be exiting the Mumbai Metro line 2, Mumbai Sea Link extension project, and two large transmission projects. Last year, Reliance pulled out of the Worli-Haji Sea Link project after two years of dispute with the government. Its 32-km second phase Metro Rail project faces termination due to lack of substantial progress.
The decision to pull out of these substantial big-ticket projects by Reliance follows other players such as GMR Infrastructure who requested to terminate its contract with the National Highways Authority of India (NHAI) to construct the 555.5km Ahmedabad-Udaipur-Kishangarh expressway-widening project, the largest brownfield road project awarded in India under a public-private partnership.
|Delays Stifling Growth|
|Indian Construction Industry Value (US$bn) and Real Growth (% year-on-year)|
Considering the potential in the Indian infrastructure market in light of existing infrastructure assets creaking under immense population pressure and the country's economic success, the trend for large infrastructure players to want to pull out of projects is indicative of our recently revised down forecasts for the Indian infrastructure sector (see ' Construction Growth Hampered By Reform Inertia', 17 May) . For FY2013/14 and FY2014/15, we forecast real growth reaching 7.0% in FY2013/14 (previously 7.6%) and 7.6% in FY2014/15 (7. 9%). Our decision to revise these forecast are precisely because of the factors which have prompted the move by Reliance; structural weaknesses in the country's investment climate remain considerable, and we still see project execution in the infrastructure sector being hampered by a host of issues such as land acquisition and environmental clearances, be it roads, rails, urban rails, airports, ports and power plants.
That said, the Indian government is making some attempts to resolve the regulatory hurdles in the various infrastructure sub-sectors - on May 16 2013, Prime Minister Manmohan Singh initiated work on a new law to resolve disputes in public contracts being executed on a public private partnership basis. However, we highlight that it is becoming increasingly difficult for the government to push forward these reforms due to its weakening political position and the upcoming parliamentary elections.