After National Highways Authority of India (NHAI) banned companies with three road projects pending for financial closure from bidding any further, the industry has asked the government to relax the definition of financial closure.
According to the model concession agreement, ‘financial closure’ is defined as fulfilment of all conditions precedent to the initial availability of funds under the financing agreements. The phrase 'conditions precedent' refers to commitments to be met by the developer and by NHAI. After loans are tied-up, lenders agree that the 'conditions precedent' in the loan document are fulfilled. "These are the conditions to be fulfilled prior to when you can start working on a project. These can be land acquisition, rehabilitation, and environmental clearances," says Arvind Mahajan, Head-Infrastructure, KPMG. While the developer's responsibility will be arranging for shareholders’ funds, setting up an escrow account; NHAI deals with the necessary state support required for the project in terms of clearances and land acquisition.
Sources said the representation made to the government, led by a large Mumbai-based infrastructure company, asked for relaxing the 'conditions precedent' part. Industry experts said re-working this part of the model concession agreement would reduce the time taken for financial closure by one to one-and-a-half months.
On an average, financial closure of a road project takes around five to six months. It can go up to nine months for a larger-sized project. If a company has one such large project in hand, the new rule of NHAI would restrict a company from bidding for new projects for this time period. "This is not fair to the industry," said another developer, who wished to remain anonymous. "They can't bring about this rule in retrospect. If they would have told us about this earlier, we would have bid for fewer projects."
Developers said there are many formalities to handle even before one can start raising funds for a project. After a letter of award is given, it takes 30-45 days to form a special purpose vehicle (SPV). After presenting the SPV document, the concession agreement has to be put through. Only after which is the developer allowed to proceed for financial closure. This process takes around three months. After necessary approvals are in place, companies approach banks for funds. Banks appraise the project and sign loan agreements, and this could take anywhere between two and three months.
While such proposals are underway, banks also say they have their job cut out in terms of the increased number of companies which will approach them for financial closure. "There are serveral projects slated for financial closure. Not many projects were financially closed, as last year there was a lull in awarding projects and some were awarded in the later part of the year. Companies should and they will hasten financial closures. There will be a bit of pressure on companies for faster financial closures," says B K Batra, executive director, IDBI.