FE Editorial : Road to financing

Dec 07 2012, 02:07 IST
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SummaryWith nearly 20 highway projects on hold due to delays in financing, the government has done well to find new ways to add to the comfort of lenders.

With nearly 20 highway projects on hold due to delays in financing, the government has done well to find new ways to add to the comfort of lenders. Under the current scheme of things, there is a tripartite agreement between the project developer/concessionaire, the financier and the National Highways Authority of India (NHAI) which is the concession authority. So, should NHAI choose to terminate the concession for instance, 90-100% of debt payment is guaranteed by NHAI. Similarly, under certain conditions, NHAI can appoint another concessionaire to run a project if the original concessionaire is not doing a good enough job—this is one of the possibilities being discussed in the context of the Delhi Gurgaon expressway where traffic pileups are legion. While some believe that the lender also has a similar power to replace recalcitrant concessionaires with new ones to safeguard their investments, this is not explicitly provided for in the model concession agreement (MCA).

This is what the government is now planning to introduce in an explicit manner in the MCA. This is important because even when the MCA talks of refund of debt, more often than not, banks lend far in excess of the termination value of most projects. So, if NHAI values a road at R1,000 crore at the time it is being bid out, banks may lend the project R2,000 crore based on traffic projections. In which case, the promise of a R750 crore refund (assuming at 3:1 debt-equity ratio) doesn't really provide any manner of comfort for the lender. So allowing lenders to step in and replace concessionaires is an important safeguard for lenders. Apart from this, the government is also looking at giving infrastructure debt funds who take over the debt of such projects a senior lender status—this will go a long way in increasing lender comfort. If banks are to be very largely protected while lending to road projects, there is little reason for RBI to continue to classify them as unsecured loans—apart from ensuring loans cost more, banks typically allocate smaller proportions of their portfolios to unsecured loans. The Prime Minister has done well to instruct the roads ministry to ask the PM's Economic Advisory Council, headed by former RBI Governor C Rangarajan, to look into the matter.

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