Only six out of 42 projects worth over Rs 50,000 crore awarded by the National Highways Authority of India (NHAI) since January 2009 have achieved financial closure, raising fresh doubts over Roads and Highways Minister Kamal Nath’s ambitious plans to add 20 km of road per day.
This poor record is the result of banks’ reluctance to lend to projects for which constructors have made high, unviable bids. The 42 projects cover roughly 3,200 km.
“Banks are reluctant to lend to projects for which companies have bid aggressively,” said Sanjay Sethi, executive director & head of Infrastructure Group at Kotak Mahindra Capital Company.
Under the bidding system, companies that bid the highest negative grant or the lowest Viability Gap Funding (VGF) win these projects that come under the Build, Operate, Transfer (BOT) scheme.
This means that if NHAI sets the cost of building a stretch of highway at, say, Rs 1,000 crore, a bidder may have won the project offering Rs 1,200 crore, implying a negative grant of Rs 200 crore.
VGF, on the other hand, is government finance demanded by a concessionaire to make a project financially viable and can be up to 40 per cent of the project cost.
Bankers says companies have been unduly aggressive in offering negative grants for about 10 of these 42 projects, and that the toll income would be insufficient to justify the cost over 15 or 20 years.
“No financially unviable project will attract finance,” said a source in Hindustan Construction Compnay Ltd, which has won three highway projects.
Kotak Mahindra’s Sethi also points out that “the winners of many projects are big developers with exposure in other sectors making banks a bit wary about lending”. However, several smaller companies have also over-bid in an attempt to build up their portfolios, which creates another set of problems for lenders.
As a solution, NHAI came up with a new policy a few weeks ago under that allows a company to bid only for three projects at a time. Companies will be allowed to bid again only when the financial closures of these projects are over.
However, this policy does not cover projects for which bids have already been made.
The issue of lack of financial closure assumes importance because the current United Progressive Alliance (UPA) government's track record on road projects has been poor. Where the previous National Democratic Alliance government built roads at a pace of 15 km per day under the Golden Quadrilateral, the UPA's first stint saw the addition of just 5 km a day.
It is this poor record that prompted Nath, who replaced Dravida Munnettra Kazhagam's TR Baalu as head of the ministry when the UPA came back to power in early 2009, to set an an ambitious road-building target, which implies adding 35,000 km till 2014.
Work on any road project can start only after the financial closure is completed. It takes six to 12 weeks from the day letter of award (LoA) is received till the concession agreement is signed and another six to eight months to complete financial closure.
"The time can be reduced maximum by around two months by decreasing some of the processing time," said Parvesh Minocha, managing director, transportation division, Feedback Ventures.
