Government stands to gain via highway bailout

Industry returns may be capped in initial years

The rescheduling of premium payments for highway developers might not benefit the entities involved, as the relaxations might be saddled with a number of conditions. While the exact contours of the rescheduling aren’t known yet, it is believed the government wouldn’t allow developers to make equity returns on the projects until the premium they owe to the government is paid.

On Tuesday, the Union Cabinet had referred the matter to a panel tasked with working out the details of the bailout package, after the Ministry of Finance and the Planning Commission had raised objections to it. Initially, the package is expected to provide relief to 23 projects, with premium accounting to Rs 53,000 crore, helping debt-laden companies such as GMR, GVK and Ashoka Buildcon.

THE RESCUE ROAD

Conditions

• Developers may have to pay interest on rescheduled premium
• Minimum amount of premium will have to be paid every year
• There would not be any reduction in net premium payout
• Stake sale in projects may not be allowed until it is constructed

Why developers are seeking relaxation

• Claim the National Highways Authority of India has not given the required land
• High premia quoted when loans were easily available
• Industry is in trouble

Between 2007 and 2009, infrastructure developers had bid aggressively and offered to pay the government a certain amount of money upfront as premium to bag projects. But after the economic environment changed and expected earnings from projects fell, these premia became a burden. “The net present value of the rescheduled premium will be the same as the quoted premium,” said Vikash Sharda, senior manager at PricewaterhouseCoopers.

The amount the government plans to make after rescheduling would remain the same, but it would ease cash flows for the companies. “Though it will initially help, it is simply pushing your problems away to another date. The problem will surface on another date for projects that have aggressively bid premia,” said Mukund Sapre, executive director of IL&FS Transportation Networks (ITNL ). Though none of the ITNL projects are part of the list of 23 projects, these could get relief if all the projects that had quoted premia are included in the package.

Developers with rescheduled premia would have to pay a basic premium every year. Also, these developers cannot exit the project until the construction is complete. This rules out the possibility of a company looking to raise equity required for a project by selling stake in it. “This move will help developers to some extent. But there are too many caveats. First, developers will have to pay interest on the premium,” said Sharda at PricewaterhouseCoopers.

However, a one-size-fits-all approach to restructuring might not help troubled projects. “The government should look at each project specifically, as to the kind of relaxations it could get,” said Vishwas Udgirkar, senior director at Deloitte Consulting.

There are various reasons why developers are seeking relaxations. Developers claim the National Highways Authority of India has not given the required land. At the same time, many developers are quoted high premia at a time when loans were easily available.

“There are some lapses from our side and some mistakes were made by the government. But the industry is in trouble and the government should look at it from an industry perspective, as almost all of us are seeking for some sort of a bailout,” said a highway developer.

Udgirkar said the relaxations wouldn’t just help revive existing projects, but also projects that are yet to seek bids. “This move will ease pressure on liquidity of companies. This might allow developers to participate in the forthcoming bids,” he said.