Acute fund crunch forces builders to seek exit from road projects
Infrastructure firms, which are now required to stay invested in a road project for years, plan to deploy freed-up equity funds in fresh road projects.
Infrastructure firms, which are now required to stay invested in a road project for years after completion—nearly close to the end of the concession period—plan to deploy freed-up equity funds in fresh road projects.
As per existing guidelines, the developers of build, operate and transfer (BOT) road projects awarded before 2009 do not have a complete exit option, while those awarded after 2009 can exit only two years after completion.
In the case of pre-2009 projects, the developer can sell only up to 74% and will have to continue to hold the balance 26% till the end of the concession period.
The key road projects awaiting financial closure for months include those by infrastructure firms like GVK, GMR, L&T, IL&FS, Gammon, IVRCL, Essel Infra, Gayatri, Ramky, Madhucon, KNR, Soma, Navayuga, Sadbhav, Transstroy and Unity Infra, among others.
Of the 43 road projects awarded during the last year or so, at least 35 are yet to achieve financial closure. The plea to relax guidelines comes at a time when the government has announced an ambitious target to build 17,000 km of roads over the next two years.
In all, the National Highways Authority of India (NHAI), the nodal agency, had awarded 21,000 km of road projects during the past three years. As against the target of 9,500 km of road projects during this fiscal, the NHAI could award only 600 km so far.
In a representation to the union road transport and highways ministry last week, the National Highways Builders Federation (NHBF), the highway builders lobby body, also sought policies that encouraged investments from insurance and pension funds into the sector.
NHBF Director General M Murali said road developers will have to spend Rs 2.1 lakh crore, both debt and equity, to complete the 21,000 km of road projects. To execute the projects, they (developers) need to raise Rs 1.57-1.68 lakh crore of debt and pump in Rs 52,500-63,000 crore as equity.
The global economic slowdown has also added to the woes of the Indian highways sector as funding through foreign direct investment and private equity has fallen dramatically.
There is not much of equity capital available in the market to support road projects, said Sanjeev Krishnan, executive director (private equity) at PricewaterhouseCoopers.
“While some private equity funds are left with very less capital, others are coming to the end of their lifecycle. Road projects, which have seen aggressive bidding, will find it difficult to raise capital.” NHBF’s Murali said even some large road projects could not achieve financial closure as either the banks have crossed their sector exposure limit or the companies have reached their threshold limit.
To bid for new projects, companies have to exit older projects to increase their threshold limit. Delays in environmental clearances and right of way also hurt fund mobilisation, said KG Naidu, vice president of finance at Gayatri Projects, which has seven road projects worth Rs 5,200 crore in its portfolio.
“Inordinate delays result in substantial cost escalation and payment defaults to banks, leading to downgrading by rating agencies and subsequent interest rate hikes by the lenders.”
In fact, the inability to raise equity and debt funds for new projects has forced some infrastructure firms like IVRCL to stay away from bidding for new BOT road projects till the overall market improves.
Banks are cautious to lend to road projects due to aggressive bidding by certain infrastructure firms, said AK Sharma, CEO of GMR’s highway division. GMR is looking at raising at least Rs 1,500 crore through offloading up to 74% equity in its existing toll-based projects.
“Some projects are taking longer period for financial closure as banks are seriously looking into environment clearance and 80% land availability before lending.”
An executive with a Mumbai-based infrastructure firm, who did not want to be identified, said the investment and exit climate has to be conducive to bring in liquidity.
“There are many sellers of road projects but there are very few buyers.” Some road developers had even come out with innovative models to circumvent the NHAI guidelines, said a senior executive with an infrastructure firm with nearly Rs 7,500 crore of road assets in its portfolio.