Road projects hit by costly money

Highway construction and infrastructure projects worth over Rs 10,000 crore hang in the balance with companies struggling to achieve financial closure after banks began raising interest rates to 14-16 per cent from 9-11 per cent a few months ago.

These ventures account for about 40 per cent of projects worth Rs 25,000 crore that have been sanctioned by the National Highways Authority of India (NHAI), according to data from the National Highway Builders Federation (NHBF), which represents highway construction companies.

The availability of bank finance is critical to such projects because debt typically accounts for 70-75 per cent of a highway project’s cost.

The higher interest rates could require infrastructure companies to pay an additional Rs 350 crore (5 per cent of Rs 7,000 crore being the additional interest outgo) as a result.
 

OFF TRACK Key highway projects awaiting financial closure  under NHDP — Phase V
Stretch	Km
Bharuch-Surat	65.0
Panipat-Jalandhar	291.0
Surat-Dahisar	239.0
Gurgaon-Kotputli-Jaipur	225.6
Chilkaluripet-Vijayawada	82.5

Banks usually provide loans to highway developers over 12- or 13-year periods that almost cover the concession period of 15 to 20 years. If the debt:equity ratio is 80:20, the company will initially be asked to come up with half the equity portion upfront. Both bank and the company then plough in the remaining amount in equal proportions.

Once the construction of the project is complete, the company will be provided a moratorium of six months to a year on the principal, which means the company is required to pay only the interest. Repayment of the principal and interest kicks in thereafter.

“Banks that have made long-term commitments are finding it difficult to keep them owing to the credit market crisis,” admitted Sanjay Sethi, executive-director & head, Infrastructure Group, Kotak Investment Banking.

“Though the liquidity position has improved a bit in the last two weeks, following measures by the Reserve Bank of India, banks have become more choosy about lending, so companies will find it difficult to achieve financial closure for large developmental projects,” he added.

Financial closure based on the higher rates of interest will adversely impact margins on project and make them virtually unviable, said SV Patvardhan, CEO, Madhucon Projects, a company with many BOT (build, operate and transfer) projects lined up.

Others said the high interest burden will delay several crucial highway projects, which have already missed their deadlines following legal issues on selection criterion.

“Projects will be delayed even more if the government does not ensure priority lending to highway projects with a reasonable interest rate,” said Murali M, Director General, NHBF. Government-mandated priority lending, such as to agriculture, attracts significantly lower interest rates.

As things stand, road contractors are in a bind. With the external commercial borrowing (ECB) options drying up despite several relaxations by the government this month and scope to raise money from the stock market virtually non-existent, industry sources said companies are now forced to rely increasingly on domestic banks that are reluctant to provide cheaper money.