Balarami Reddy, executive director-finance of Hyderabad-based IVRCL (the engineering, procurement and construction company), is one of those lucky chief financial officers who could manage 30-40 per cent oversubscription while raising debt for his road projects.
“This was the case four years back too. The ease of fund-raising depends on the lender’s confidence in the company,” he said.
The difference between then and now, he says, is that lenders such as Tamil Nadu Mercantile Bank, Karur Vysya Bank, HDFC Bank and Kotak Mahindra Bank are participating. “Four years back, there were only nationalised banks, as private banks would not touch these long-term projects. But they have now started lending to the sector,” said Reddy.
As a result, road companies now have a wider choice of lenders. “The basket of lenders to the sector has increased. Earlier, there were five-10 who used to regularly lend for road projects. Now, there are 17-18,” said K Ramachand, president and CEO of IL&FS Transportation Networks.
Over the years, lenders have become more confident about the roads sector, as it has demonstrated a quite a few success stories. “Most road projects are giving a good 18-20 per cent return, unless they have been extra competitive at the bidding stage. This is much higher than the 15-16 per cent expected from projects when they were conceptualised,” said Vishwas Udgirkar, senior director of Deloitte.
The sector has established a good track record, as opposed to the time when public-private partnerships were at their inception. When the concept of toll roads began, there were many apprehensions. However, over time, it is clear people have accepted it, leading to robust traffic growth across many sectors of national highways.
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Experts say road companies have also become more efficient, with many projects being commissioned without delays, making banks more confident about these companies’ execution capabilities.
P N Ramaswami, general manager with Bank of India, said policy reforms and, more important, better project management – better traffic estimation, cost, time and contract management - had improved the view on the sector. “This has advanced the break-even for many projects. It is more so for national highway projects than state highway ones,” he said.
Construction costs in the sector are also more stable as opposed to three-four years before, when key commodities like cement and petroleum products were extremely volatile. “Now, costs are under control in spite of the rising inflation,” said Udgirkar.
Changes in the regulatory regime have also done a lot to get more banks to lend to the sector. The National Highways Authority of India (NHAI) now seeks bids only for those projects where 75-80 per cent of the land has been acquired. This, bankers say, takes away a large portion of the risk associated with any project.
“Major land acquisition bottlenecks have already been tackled by NHAI and the confidence level has increased since then,” said a top official of a large private sector bank.
Earlier this year, the Reserve Bank of India classified loans extended to infrastructure as secured loans, where an infrastructure asset can be used as a security for the loan. This gave banks more headroom to lend to infrastructure and road projects have benefited.
“The government was earlier investing around 80 per cent of the money that went into building roads. Now the balance has shifted towards the private sector, which is spending around 50 per cent,’ said Reddy.