Lenders want 100% land acquired before awarding highway projects

Jan 15 2013, 00:06 IST
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SummaryLong-term lenders like IIFCL and IDBI Bank are unlikely to fund road projects where land acquisition is incomplete, a move that could scuttle plans to award projects of 8,000 km this fiscal year.

Long-term lenders like IIFCL and IDBI Bank are unlikely to fund road projects where land acquisition is incomplete, a move that could scuttle plans to award projects of 8,000 km this fiscal year. Lenders and builders have approached the finance ministry, road ministry and NHAI, insisting that road contracts should not be awarded without all clearances in place.

“We are not taking up new projects unless 100% land acquisition is done.

We are taking up the issue with NHAI,” IIFCL chairman SK Goel told FE. “We feel other lenders will follow suit,” he added.

An IDBI Bank official said lenders have started avoiding road projects or have started thinking so after GMR terminated an agreement to build a 555-km highway in Gujarat and GVK threatened to pull out of a 330-km highway in Madhya Pradesh.

Although the road ministry and NHAI are weighing various options including barring GMR from bidding for a few years, lenders and builders are insisting on all clearances before thinking of new projects.

National Highways Builders Federation director general M Murali told FE: “We want NHAI to make 100% right of way along with environmental, forest and wildlife clearances available before awarding projects. Projects shouldn’t be put up for bidding before achieving the same.”

Highway builders wrote to NHAI chairman RP Singh on January 9 to consider the proposal. Feedback Ventures chairman Vinayak Chatterjee endorsed the suggestion: “The government should make it mandatory to have all necessary approvals in place before inviting bids. Developers moving out of esteemed projects has a negative impact. The government should obtain approvals first and then invite bidders.”

The economic slowdown and the policy logjam have slowed growth in bank credit to infrastructure from 38.6% in 2010-11 to 17.6% last fiscal. Outstanding bank credit to infrastructure was R6,19,100 crore at the end of March 2012, out of which 18.5% went to the road sector while power accounted for 53.1% and the remaining 15.1% went to telecom.

With growth slowing and bad loans rising, some lenders are citing prudential norms to say their exposure to infrastructure companies have hit the ceiling and hence there could be no fresh loans. Road projects comprise 53.4% of all public-private partnerships, entailing over Rs 1.76 lakh crore investments. Several infrastructure companies have borrowed overseas for special purpose vehicles developing the projects, increasing debt levels.

Road builders also point to the large number of projects awarded in the last three years which has led to insufficient credit availability and consequent difficulty in achieving financial closure.

“Raising equity through initial public offers or follow-on offers seems unlikely due to poor market conditions. Banks are reluctant to lend either,” Murali said. “Lenders who used to readily finance road projects have woken up to the non-availability of adequate equity and heightened risk perception in the road sector. Highway finance comes only with pre-conditions like 100% right of way and environmental, forest and wildlife clearances in place,” he added.

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