Global Infrastructure & Project Finance 

India  Outlook Report 

Indian Infrastructure Outlook 2011 
Rating Outlook 
Stable Outlook: Fitch Ratings has a stable outlook for Indian infrastructure debt ratings in 2011. This expectation covers the spectrum of rated projects across the energy (thermal and biomass), transportation (roads, rail and airport) and urban infrastructure (solid waste management, desalination) sectors. The generally low ratings’ profile incorporates numerous and varied risks — especially for the majority of projects which remain under construction — but also accounts for the stable ratings’ outlook. The country’s positive economic performance and latent demand for key infrastructure assets are significant contributors to this outlook. Key Project Risks to Watch in 2011: with respect to infrastructure debt ratings, these are execution capacity, the propensity for construction risk, over‐dependence on project sponsors for risk mitigation and financing constraints. These risks have implications for the development of infrastructure finance in India beyond 2011. Toll Road Problems: Many of India’s toll road projects are still under construction and face lingering right‐of‐way problems. In some cases, Fitch expects sponsors to continue extending support through ad‐hoc equity injections, in order to maintain credit quality. Other toll roads which are in the early stages of traffic and revenue ramp‐up could face financial stress, given the broad industry trend of underperformance vis‐à‐vis original traffic projections. The debt for some fully operational toll road projects could be upgraded, although such action will be limited by aggressive loan amortisation profiles and interest reset provisions. Construction Progress: Power projects which have the necessary physical and financial requirements in place should be able to register construction progress and retain stable credit profiles, especially where their sponsors have broad experience within the sector; a few may see upward rating migration as they become operational. Nevertheless, the unprecedented pace of new thermal power plant construction in India is placing stress on construction schedules and also on the value chain for skilled manpower, equipment and fuel supplies. Increase in Passenger Numbers: Airports have benefited from a continued uptick in passenger numbers throughout 2010, coupled with the slightly improved financial health of many airlines. Both trends are likely to continue in 2011. Residual construction risk for expansion and modernisation projects, and dependence on as yet unrealised real estate revenues, continue to constrain ratings. 

Rating Outlook 

S T A B L E  E
Analysts 
S. Nandakumar +91 44 4340 1710 s.nandakumar@fitchratings.com William Streeter +65 6796 7224 william.streeter@fitchratings.com R. Venkataraman +91 44 4340 1702 venkat.rajaraman@fitchratings.com 

Related Research 
Applicable Criteria · Rating Criteria for Infrastructure and Project Finance (August 2010) Other Outlooks · Energy Infrastructure Outlook 2011 (December 2010) · Indian Infrastructure Outlook 2010 ‐ The Accommodation of Project Risk (March 2010) · 2011 Outlook: Global Transportation Infrastructure (January 2011) · www.fitchratings.com/outlooks

What Could Change the Outlook 
Individual project debt Outlooks could change. For projects under construction, unexpected delays in completion — or positive surprises in terms of achieving early completion — could trigger a change in Outlook or a rating action. In respect of operating projects, marked deviation in actual revenue performance (in comparison with initial forecasts) may result in an Outlook change. Continued hardening of interest rates, leading to pressure on coverage matrices, delayed loan disbursements or difficulties in raising residual sponsor equity commitments, could contribute negatively to a project debt Outlook. 

www.fitchratings.com 

24 January 2011 

India’s vast project pipeline (see Table 1. sponsor dependence and financing constraints.33% 6.33% RWN Stable Source: Fitch  Positive Negative Key Issues for 2011  The majority of current rating Outlooks are Stable. the increasing scale and complexity of projects (the road sector will soon have its own mega projects just like the power sector). India is now one of the largest and most dynamic infrastructure and project finance markets in the world (the total number of project‐based SPVs is around 800). bidding. with 39% of ratings affirmed (see Chart 1) and 44% upgraded. primarily due to a broad range of project‐specific factors. which excludes privately owned and financed independent power projects) includes projects in various stages of expression of interest (EoI).Global Infrastructure & Project Finance 2010 in Review  Fitch’s infrastructure ratings’ Outlooks were generally Stable to Positive during 2010. construction risk. construction and operation (although projects under construction form the largest grouping). Chart1: Rating Actions 2010 (%) 50 38. with respect to infrastructure debt ratings. The upgrades for the debt of these stand‐alone special‐purpose vehicles (SPVs) were entirely due to better‐than‐expected operating performance and significant reductions in construction and completion risk (often for very large projects). Consequently. The key inter‐related credit concerns to watch in 2011.com). and the small base of qualified developers available to accomplish these tasks. revenue under‐performance and counterparty payment delays.67% 44. it spans Indian Infrastructure Outlook 2011 January 2011  2  . including construction delays. Execution Capacity The agency’s belief that this dearth of execution capacity represents a key credit risk has been influenced by three factors in particular: · · · the growth in new project construction activity. but in general. there are several privately owned and financed independent power projects. these characteristics are not typical of the body of debt ratings. this includes roughly 500 concession‐based project SPVs (mostly in the transportation sectors). Downgrades in 2010 (16% of total rating actions) occurred in the transportation and municipal solid waste space. leading to pressure on credit quality. Greenfield projects — particularly those implemented by sponsors with no previous experience in the sector (a growing issue for power projects) — tend to underestimate the shortage of skilled manpower and the pressure placed on equipment vendors’ capacity. are execution capacity.89% 40 30 20 10 0 Affirm Source: Fitch Upgrade Downgrade 16.67% 3.44% Chart 2: Current Outlooks (%) 90 80 70 60 50 40 30 20 10 0 83.67% 6. particularly in the last four to five years. besides. Some transactions remain on Outlook Negative or even Rating Watch Negative (RWN) as a result of project‐ specific factors. such projects will remain vulnerable to disruption in terms of schedules and costs. According to India’s Ministry of Finance public‐private partnership (PPP) database (pppinindia.

” published March 2010). ports. in this case between project counterparties — as an important rating factor. the raising of equity. the data justifies initial concerns about the high construction risk profile of these projects and validates the findings of a previous government study about project construction risks (see “Indian Infrastructure Outlook 2010: the Accommodation of Project Risk. Fitch stated that it expected a fair amount of loan restructuring to take place over the next few years. roads. although not exclusively so. In addition. While India’s achievements in this area are impressive. Nevertheless. This data is mostly for toll road projects. the agency stated that the relatively low project debt ratings reflected both the propensity for multiple project risks to occur. in its 2010 India Infrastructure Outlook report. which were under construction at the time of the initial rating (typically rated in the ‘BBB(ind)’ category). including energy. Fitch formally recognised “jugaad” — the Hindi word for a process of accommodation between parties. as well as the economic capacity (within the project cash flows) for project debt restructuring. Governmental concession‐granting authorities have also appeared willing to extend the schedule Indian Infrastructure Outlook 2011 January 2011  3  . airports. Finally. Table 1: PPP Project Pipeline India (Number of Projects) Sector Transport Airports Ports Railways Roads Energy Education Hospitals Other Totals Expression of interest 0 1 0 5 1 0 0 6 13 Under bidding 0 9 0 78 1 0 0 26 114 Under construction 2 15 1 152 22 1 2 45 240 Operational 3 16 3 76 0 0 0 29 127 Source: India’s Ministry of Finance PPP database Construction Risk Chart 3 shows actual data for cost overruns (as a percent of original construction budget) and time overruns (in months) collected for projects rated by Fitch. capacity constraints are now becoming a serious issue. Many of these projects are now operational. education and hospitals. In its 2008 and 2009 India Infrastructure Outlook reports. rail.Global Infrastructure & Project Finance almost all sectors. In the absence of rigorous adherence to contractual provisions. either through the drawdown of available cash. or the issuance of debt. project companies and sponsors have been forced to take on additional costs. Chart 3: Cost and Time Overrun (Time overrun in months) 25 20 15 10 5 0 0% Source: Fitch 5% 10% 15% (Cost overrun %) 20% 25% 30% Fitch’s views on these construction risks and their low levels of mitigation has evolved as the pool of project debt has increased.

Sponsor Dependence Construction risk mitigants — including contingency budgets and funded reserves for capitalised interest and debt service — are almost always inadequate. banks have occasionally been willing to reschedule project loans. or until new capital market tools develop to offset some of these risks. most of the data relates to toll roads). Fitch also notches up project debt in the following instances (among others): the sponsor company has a strong presence and experience within the infrastructure sector. wildlife and tribal rights. the project is integrally tied to the core business interests of its sponsor. infrastructure projects have been able to secure funding at costs that are reasonable. Fitch rates the project debt equal to the rating of its corporate sponsor. Fitch recognises that the capacity for jugaad is limited. power traders) and coal rights are intertwined with delicate considerations for the environment. Buoyant equity markets and foreign interest in the India growth story has meant that sponsors have been able to adequately manage equity commitments. chiefly by postponing the commencement of principal amortisation. Fitch’s project debt ratings take contractual provisions for credit enhancement into account by notching up from the underlying project credit profile. This leads to situations where a portion of the credit quality is determined by an evaluation of the sponsors’ willingness and ability to lend additional debt and equity support to their project SPVs. demonstrating commercial operating date (COD) extensions of six months or more and additional sponsor equity injections of between 5% and 15% of total project costs (more in extreme cases). multiple state utility boards. this is because off‐take agreements create even more counterparties to negotiate with (eg. at least until the portfolios of operating and profitable projects increase.  Chart 4: Extension of COD/Additional Equity  (A dditio nal equity ­ % o f to tal pro ject  co st at financial clo se)  60  50  40  30  20  1 0  0  0  So urce: Fitch  5  10  1 5  20  25  (Extensio n o f COD (mo nths))  However. relative to the equity and commercial bank financing available in India. Recognising these systemic constraints and responding to the requests of project companies and concession‐granting authorities. The commercial banking system has shown sufficient depth to accommodate the debt needs of most projects. Indian Infrastructure Outlook 2011 January 2011  4  . Some project bank loan agreements allow for principal amortisation to commence within six months of COD. as long as the sponsor’s credit profile exceeds that of the project. For these reasons. Financing Constraints Except for a brief period at the height of the financial crisis in 2008.Global Infrastructure & Project Finance for project delivery. and there are no contractual provisions for project support other than the initial injections of project equity. Chart 4 documents this process for rated projects (again. Where support meets the required tests of credit substitution (an unconditional and irrevocable sponsor guarantee of project debt). the process of jugaad within the power sector could produce an outcome that is somewhat different. coupled with the expected scaling up of sponsor and commercial bank commitments for new projects over the next few years.

particularly since the ratings are at low levels and already factor in delay risk. However. many of the agreements for the ultra mega power projects allow for only a marginal level of debt service coverage. Completion Risk Most of the rated bank debt relates to projects still under construction and completion risk is often a constraint to the ratings of these projects. While the biggest effect of this could be to slow the time required for new projects to achieve financial closure. The surge of new thermal capacity creation places stress on the supply chain. due to slippages arising from bottlenecks in completing residual land acquisitions. along with the size and number of projects which require financing. With lending levels approaching the maximum permissible levels stipulated by regulatory exposure guidelines. By way of contrast. the latter has not resulted in any ratings downgrades.  Thermal Power Projects  2011 Outlook: Stable Fitch expects the dynamics of the Indian power sector to remain largely stable in 2011. Rising interest rates — as monetary authorities try to quell persistent inflationary pressures — could begin to impinge on project economics. Off‐Take Arrangements Moving Away from Long‐Term Power Purchase Agreements (PPAs): the market is witnessing a shift in the off‐take model away from generous long‐term PPAs. Volatility of capital flows and subdued equity markets could limit future equity‐raising exercises. commercial banks may find their ability to expand credit stressed. or by contractual interest reset provisions. thereby triggering an upward rating movement (thanks to the elimination of construction risk). have somewhat favourable cost structures relative to the weighted average price of electricity traded by licensees and power exchanges over the last three years. delays in receiving equipment. a few projects are close to announcing commercial operations. While significant levels of infrastructure project financing are likely to continue. or difficulties in securing coal supplies. given India’s chronic power deficit. So far. On the other hand. Fitch notes that some projects have entered into power trading contracts).Global Infrastructure & Project Finance However. the hoped for “scaling up” of financing activity — called for in government plans and anticipated by project developers — may not be so dramatic. although current rating levels anticipate higher borrowing costs. it is important to note that the price of traded Indian Infrastructure Outlook 2011 January 2011  5  . but projects with marginal debt service coverage or weak revenue ramp‐up are vulnerable to such interest reset clauses. which are inherently riskier. Fitch’s rated power project portfolio is almost evenly split between projects with power purchase or power tolling agreements and projects with merchant power risk (although in the latter category. this scenario could change. Plant Margins Normalising: although merchant power prices are still at high levels. Funding requirements are increasing. individual projects could see some downward pressure. While long‐term PPAs tend to be a positive rating consideration. Tight liquidity conditions could further choke debt availability. At an aggregate level. the credit quality of debt for existing projects could also be affected by delays in the drawdown of loan proceeds. in terms of finding and retaining skilled technical manpower to build plants and the threat of delays from Bharat Heavy Electricals Limited’s (‘AAA(ind)’/Stable) overflowing order book for boiler‐turbine‐generator (BTG) units. Fitch does not expect marked deviations from construction schedules to impact credit profiles. many of the merchant power projects.

it is becoming clear that domestic coal is grossly inadequate to fuel all of the new capacity creation (due to. though the projects emerged unscathed due to deferred term loan drawdowns and a hitherto favourable interest rate regime. the ability to earn super‐normal profits may no longer be possible. firm up shipping arrangements and the associated costs all increase the risk profile of such projects. environmental concerns). For plants that rely on BTG units from China.5/kWh in the financial forecast models of many Fitch‐rated projects should still be sustainable. Projects that have managed to secure captive coal blocks domestically are viewed as being the least vulnerable to fuel shocks and also. the agency has observed delays in achieving COD ranging from three to six months. The base case tariff assumption of around INR3. rehabilitation of displaced persons and livelihoods and protection of endangered animal species. they are unlikely to be immune from volatility in prices. by virtue of their cost competitiveness. as well as capacity constraints in the rail network. amongst other reasons. Fitch expects that. As such. Except where mines are actually acquired. the need to establish port handling facilities. Coal Supply and Logistics are Key Risks: Fitch expects coal to remain the dominant source of power generation in India in the medium term (it currently accounts for 53%). However.Global Infrastructure & Project Finance power has steadily fallen over the last three years. due to the gradual reduction in the power supply deficit and the weakening ability of the state utilities to pay high prices. Furthermore. the price advantage is slightly offset by the cost of transportation. socio‐economic sensitivities include encroachment of adjacent tribal communities. particularly for those sponsors with no track record in the industry. Despite abundant reserves. Fuel Supply Use of Natural Gas is Increasing: the use of natural gas — which presently accounts for a mere 11% of the total generation capacity — is likely to increase significantly. should benefit from relative insulation from price volatility (domestic coal prices have risen on average by only approximately 5% per year over the last decade. more resilient to drops in merchant power prices. Projects that have secured coal supply assurances from the state‐owned Coal India Ltd. projects that depend on international coal are susceptible to both availability and price volatility. as well as Indian Infrastructure Outlook 2011 January 2011  Chart 5: India Installed Capacity (GW) Renewable energy 10% Gas 11% Nuclear 3% Diesel 1% Coal 53% Hydro (renewable) 22% Source: Central Generating Authority 6  . Difficulties in obtaining land for the creation of railway siding facilities tend to weigh negatively on the cost structure. Prices should still offer reasonable margins to competitive producers. this trend of price reduction will continue. companies are looking to tap overseas sources to secure supplies. however. which will likely retain some linkage to global trends. Fitch notes that the ability to acquire the requisite land and also conclude contracts with specialist operators to exploit the mines remains a challenge. in the medium term. Fitch expects significant time over‐runs on account of delayed equipment deliveries. Recently. Reliability of Equipment and Delivery Schedules Given the aggressive implementation schedules. there are concerns surrounding the performance of Chinese boilers in Indian operating conditions. through four price increases). buoyed by recent domestic gas discoveries and proposed liquefied natural gas (LNG) imports. while also leading to completion delays. Even if projects secure the supply of natural gas under the Government of India’s administered price mechanism. Further. For projects located away from coal mines.

as well as the operational performance of the plants. The weak financial health of state utilities acts as a constraint to the large scale and rapid development of renewable energy projects. major Chinese equipment makers were estimated to have commissioned power plants of an aggregate capacity of over 4. What to Watch · Fuel supply and prices for biomass projects · Continued ability and willingness of governments to incentivise this industry  Toll Road Projects  2011 Outlook: Stable A preponderance of toll road construction projects are now at a stage where lingering right‐of‐way problems may result in extensions of COD. However. while the fixed power tariff incorporated in the PPAs offers solid margins. As a number of road projects complete construction and move into the critical ramp‐up phase. By the end of 2010. For Fitch‐rated biomass project debt. Notwithstanding India’s buoyant economic growth providing an excellent prop for toll road revenues. This is likely to be followed by the need for additional project equity in some cases. or where the effects of the economic downturn were temporary and were later offset by robust growth). The government estimates that Chinese equipment will form around 39% of total new capacity by the end of the Plan period. much of the Indian Infrastructure Outlook 2011 January 2011  7  . A small portion of Fitch‐rated operating toll road and rail project debt was upgraded last year (often in cases where usage and revenue growth were significantly higher than the original base case financial forecast. expects to see varying degrees of traffic under‐performance vis‐à‐vis original forecasts (which have turned out to be overly optimistic). going by the evidence of 2010. this scenario may repeat itself (India’s economic prospects certainly seem supportive). the key drivers of new investment in this space will be a function of financial and fiscal incentives. some projects seem advantageously positioned to register better‐than‐expected vehicular flows. imparting a Positive Outlook to their ratings. which have experienced sharp volatility. Fitch. In Fitch’s view. However. leading to higher toll revenues. As more projects become operational. What to Watch · Construction schedule delays · · · Fuel supply and price stability Trends in merchant power prices Credit quality of state utility boards that purchase power  Renewable Energy Projects  2011 Outlook: Stable The federal government’s Ministry of New and Renewable Energy has set an ambitious target of achieving 15% of total electricity generation from renewable sources by 2020. as well as a potential rescheduling of the loan's first principal payment date (with a higher rate of interest likely). constituting nearly 25% of the total capacity added in the first three years of the on‐going 11th Five‐Year Plan (the Plan). the key to rating movements will be the behaviour of fuel prices (mainly agricultural waste).Global Infrastructure & Project Finance the possibility of bilateral issues between India and China relating to visas for Chinese workers. individual projects could suffer from markedly reduced cash flows caused by faulty projections.000MW.

ADFs are authorised through 2012 and. The growing trend in passenger traffic. Along with higher load factors. In coming months. particularly in the domestic segment which was the primary driver of growth. to finalise a statutory framework for determining aeronautical revenues. Nevertheless. given the aggressiveness of initial sponsor financial forecasts and varying performance within different economic regions of the country  Airports  2011 Outlook: Stable The stable outlook emanates from the aeronautical revenues provided by the sustained recovery in passenger numbers witnessed through 2010 and expected to continue in 2011. Fitch expects the newly constituted and independent regulator. as can be seen from Chart 6. the Aviation Economic Regulatory Authority (AERA). Collection of airport development fees (ADF) to part‐fund modernisation capex was buoyant. What to Watch · Ability of projects to successfully complete construction and achieve COD. is a continuing credit quality constraint. raising equity and restructuring debt. restricts the potential for future rating upgrades. although there was some degree of volatility. to the extent to which they significantly mitigate debt issuance. especially with the sector’s propensity for delays in land acquisition · Traffic and revenue ramp‐up of toll road projects. thus mitigating this potential uncertainty. given the frequent interest reset provisions that are such a staple feature of India’s project finance loans. This risk is reflected in the current ratings. and while construction progress has thus far been satisfactory. financial profiles are expected to improve.Global Infrastructure & Project Finance boost in usage and revenues may be offset by higher interest costs. could in some cases provide a boost to credit quality. reducing counterparty risk for airport operators. Airlines are slowly moving towards profitable operations. gained further momentum in 2010. This. What to Watch · Ability to successfully complete massive capex plans within time and cost budgets · · Monetisation of real estate revenue streams Shocks in the global economic environment which may pose a setback to the rejuvenation of air travel demand Indian Infrastructure Outlook 2011 January 2011  8  . challenges to the successful completion of major modernisation/expansion projects remain. mirroring the uptrend in passenger traffic. plus the financial implications of construction phase risks and the aggressiveness of project loan amortisation schedules. which began in 2009 after the global economic crisis. While lenders benefit from uninterrupted operations at major airports that are under expansion and improvement. the overwhelming dependence on non‐aeronautical revenue streams (particularly from real estate development) to meet capex and debt service needs in sponsor base case financial forecasts.

to migrate from commercial banks to the fixed income market. Bank financing. Some level of consolidation within that industry is possible. Indian Infrastructure Outlook 2011 January 2011  9  . The limited number of large developers with the knowledge to execute large projects will find their financial resources and managerial/technical capacity stretched. and with all its limitations and imperfections) for private sector participation in the design. could be a limiting factor for new asset creation. as India seeks to address its latent demand for quality infrastructure. Systemic constraints — such as socio‐political and environmental issues that are involved in land acquisition and the exploitation of resources — as well as an established but somewhat inconsistent and inefficient legal and regulatory regime. The problem may be aggravated if tight liquidity conditions in the banking system persist for a considerable period of time. 3. Contributing to this stable ratings outlook for the debt of India’s infrastructure projects are: the latent demand for good quality infrastructure. 4. 1. and a supportive economy. could dampen new investment. since they are likely to shape the future development of infrastructure finance in India in the following ways. construction risk. The key interrelated concerns highlighted in this Outlook report for 2011 are execution capacity. the flexibility of the present banking system. sponsor dependence and financing constraints. This trend is exacerbated by the current reluctance of project debt. m) 10 8 6 4 2 0 Sep 07 Feb 08 Jul 08 Jan 09 Jun 09 Dec 09 May 10 Oct 10 International Domestic Source: Aiports Authority of India  Conclusion  Most projects should be able to contain and manage risks within the stress or tolerance levels assumed by their current ratings. 2.Global Infrastructure & Project Finance Chart 6: Air Passenger Numbers Sep 2007 to Oct 2010 (Passengers per month. given encroaching sector exposure guidelines. financing. construction and operation of infrastructure assets. the evolution of a working model (particularly over the last six years. characterised by medium‐term tenors and fluctuating interest rates. These broad themes will be monitored. particularly in the case of operating projects.

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