India infrastructure: Built on debt

Some day, the Delhi Metro will be able to take race fans to the Buddh International Circuit, a $400m, 16-turn, state-of-the-art track on the outskirts of India’s sprawling capital.

A gleaming new highway connects the track to both Delhi and the tourist destination of Agra. But for now, there is little traffic on the highway leading to Buddh — and even less on the pristine racetrack.

It has been three years since Formula One abandoned the Buddh International Circuit, adding it to the sporting world’s crowded list of white elephants. It does not stand in total isolation, however.

Block after block of concrete skeletons of towers that were meant to provide up to 200,000 apartments line the highway, casting shadows on dusty wasteland, dried riverbeds and mesquite weeds.

Welcome to what is likely India’s largest ghost city, which extends across five expansive parcels of land along the highway adjacent to the racetrack. What was meant to be the crowning achievement of Jaypee Group and Jay Prakash Gaur, its 85-year-old patriarch, has become a monument instead to unrealistic aspirations and poor execution on the one hand and a shortfall in growth, the high cost of capital and an uncertain political landscape on the other.

The scale of Jaypee’s ghost city rivals that of some of China’s famous unoccupied cities. Fortunately for Jaypee, it also owns a collection of power and cement plants across India as well as three listed companies. Unfortunately, it also has about $12bn of debt, creditors and analysts say.

Jaypee is not alone in its plight. The company is ranked number six of 10 indebted Indian conglomerates that collectively owe about $125bn to their bankers, and account for 13 per cent of all bank loans in India, according to data from Ashish Gupta, an analyst with Credit Suisse. Others on the list include Lanco, a construction and power company; GVK, an energy and transport group; and GMR, an infrastructure conglomerate.

They are among the companies that should be leading India’s efforts to bolster its inadequate infrastructure, but instead are hampered by high debt levels and weak balance sheets.

In many ways, the difficulties of these groups embody the problems facing modern India, where private sector investment has virtually ground to a halt. The cost of capital is high, and banks are reluctant to extend credit because they have too many bad loans.

“Infrastructure companies are struggling and only the government can kick-start infrastructure,” says the chief executive of a prominent Indian company. “I don't see any market trigger.”

If Narendra Modi, the prime minister, is to achieve his goal of boosting economic growth, he needs to attract private sector capital to improve roads, rail, ports, power and other infrastructure. India’s infrastructure could require investment of up to $1.7tn by the end of the decade, the World Bank has estimated.

Though the government says it is building 13km of road per day, construction in India’s cities has not kept pace with the rapid growth in the urban population, and the state of public transport remains poor.

This has contributed to a host of problems in India’s cities, including traffic congestion, high numbers of road accidents and pollution, Barclays has noted.

Only two of the 53 cities with a population of 1m or more have meaningful public rail programmes. More than $120bn should be invested in metro rail by 2031, the bank estimates.

Despite Mr Modi’s pro-business rhetoric, the private investment required for such projects is still lagging due to unpredictable regulations, powerful government-linked entities that often do not honour contracts and other structural problems.

And then there is debt. Jaypee, for one, needs at least $1bn every year just to service its debts, bankers say. Like many other highly indebted companies in the country, it has technically defaulted on some of its debt, Mr Gupta of Credit Suisse notes.

In some cases, the Reserve Bank of India is letting banks roll over loans to indebted infrastructure companies but only if they have good assets. Until indebted groups can raise the cash to repay the banks — either by selling assets or completing projects so they generate cash flow — the new investment that India needs is still not going to materialise in anything like the magnitude the country requires.

“The problem is that the cash flows from infrastructure are a matter of 25 years while the banks don’t do long-term lending. The combination of the economic slowdown and cash flows that don’t match repayments is the problem,” says a senior official at the Reserve Bank of India.

‘We paid the price’

That is why, a year after Mr Modi took over, optimism about the government is waning. A glimpse at the circumstances of the Jaypee Group highlights how long it will take for corporate India to recover from years of slow growth and poor governance.

Jaypee needs hundreds of millions of dollars to complete construction of the mostly empty residential towers along the highway, but that money is not coming in.

“In the fullness of time, everything might work out,” says one of the most successful real estate investors in India. “But that only works if you can stay the course. Without debt, you can play for time. But we are talking about two decades in the future and, with those sorts of debt loads, how do you keep yourself alive until then?”

Mr Gaur holds the inconsistent and changing policies of past governments largely responsible for his circumstances today.

“The problem is the economic policy of the government. India grew at 9 per cent for 10 years,” he says from his office outside Delhi, the walls covered in calendars illustrated with paintings of Hindu gods. “Then suddenly from 2009 on, we paid the price. The use of cement came down and we did not get the price we expected.”

Mr Gaur’s problems began in 2003, when Jaypee, which is one of the largest cement producers in India, won the right to build the highway, officially known as the Yamuna Expressway. The group would build the 165km road and collect tolls for 36 years, then transfer it back to the state government of Uttar Pradesh.

The real benefits came from gaining the right to develop five parcels of land, a total of more than 6,000 acres. The land, for which he paid only the acquisition cost, is close to Delhi alongside the highway in Noida and Greater Noida.

Mr Gaur has become one of the largest landowners in the area. Official plans to extend the Delhi Metro to the area have boosted the prospects for the land increasing in value.

“Without the land development, the road is not profitable,” says Udayan Sharma, head of investor relations for the group.

The group embarked on an ambitious plan to build apartments in high-rise blocks with names such as Kensington Park and Imperial Court, as well as town houses that would sell for up to $2m.

“At Jaypee we say: ‘No dream too big’,” it says in glossy marketing materials.

But things did not go exactly as planned. Formula One abandoned the track after holding races there for three years, until 2013, and the construction on most of the housing developments has been halted. “The racetrack is an anchor; it is not a money spinner,” Mr Gaur says.

Off at the races

Formula One’s withdrawal was related in part to the loss of an entertainment tax waiver that had been granted by the previous state government.

Mr Gaur says it also had to do with the desire of race organisers to schedule it in March, rather than October as his company had wanted.

At the same time, construction on the high-rise buildings was delayed after the National Green Tribunal raised concerns over its impact on a nearby bird sanctuary.

Not many apartments appear occupied; laundry flaps in the wind from only a few isolated balconies at the Pavilion Court. A hospital is functioning as are several schools. But the sites are a far cry from the integrated communities the brochures promise.

“I have heard some people say that the only place that they have seen scale like this is in China,” says Mr Sharma, with a mix of sorrow and pride.

Group executives say they have no bank debt on the real estate. Jaypee has collected deposits from buyers, but those deposits are paid on a rolling basis as construction proceeds; as the construction slows, so does the cash from buyers.

“This is the story of the vast majority of real estate in India,” says the property investor. “There is a cascading effect. When the money for one project stops, there is no money for the next project.”

The track which once hosted Formula One is for rent and occasionally hosts company races such as a recent event for Tata trucks, auto shows and new model launches.

At night, barbed wire and security guards discourage youths from breaking in to race their motorcycles.

While Mr Gaur says the departure of Formula One is temporary, the revenues coming in are a fraction of the money invested.

‘Land is always precious’

The group has sold some of its power and cement assets in its attempt to raise cash, which is one reason creditors have been patient with Jaypee.

“They have been among the most proactive of all the indebted groups,” says Sanjay Bhandarker, who heads Rothschild’s Indian operation.

Because Jaypee used high-quality equipment, the plants could readily attract buyers. Still, the value of the assets is far less (a total of $3.4bn raised through such sales) than the face amount of the debt, lenders say. “Will the banks force more asset sales to buy time?” asks the head of a bank with a small exposure to the group.

Mr Gaur remains optimistic.

“There is always a cycle. Land is always precious but sometimes it takes time,” he says with a nod at the gods on his wall. “When the government builds the new airport near Agra, the land will become platinum. How can we be in trouble with such gorgeous projects? Next year we will be all right.”

This piece has been corrected to reflect the fact that the Yamuna Expressway has been completed.

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China and Japan: Regional rivalry has yet to pay off for India

India should be the biggest beneficiary of the competition between China and Japan to gain influence in the region. But obtaining credit from its cash-rich neighbours seems problematic.

Officials in Delhi view Chinese initiatives, including the “One Belt One Road” plan and the Asian Infrastructure Investment Bank, as a conspiracy to offload excess capacity in everything from cement to steel on them. They add that Narendra Modi’s “Made in India” campaign carries a tacit message: do not import from China.

Another source of capital, the New Development Bank, the so-called Brics bank of the emerging economies of Brazil, Russia, India, China and South Africa, has named the Indian KV Kamath as its chief executive. But the bank has been slow to get off the ground, partly because governments in Brazil and Russia have other priorities.

Tokyo has made India the largest recipient of aid and subsidised lending. But the Japanese private sector is reluctant to invest in India because of the lack of commercial terms on offer, such as “cost plus” formulas for power plant projects.

That leaves the Indian government itself. Arun Jaitley, finance minister, acknowledged last week India had fallen short of its targets for modernising its infrastructure and that many projects had been hampered by disputes and red tape.

But he said the government was dedicating more funds to infrastructure, aided by extra levies on petrol after the fall in oil prices.

It is slowly making progress, building 13km of roads a day.

“We are creating a negotiating mechanism to resolve disputes and emboldening civil servants to take decisions without worrying that they will be questioned by investigating agencies [for corruption],” Mr Jaitley said. “And contractors who can’t perform should exit.”