Bankers back out of 'premium' road projects

Infrastructure developers, who have won highway projects by offering huge premiums to the government, might find it tough to finance them.

Bankers feel such aggressive bids, where developers have refused viability gap funding for projects, and instead, offered premiums to the government, could make the projects unviable. State Bank of India (SBI), one of the prime lenders to the infrastructure sector, has been wary of lending to such projects.

“The premiums quoted for these projects will be paid from the cash flow of the road project in the initial years. We feel the revenues will be used entirely to pay premiums and interest on loans and there will not be much left to pay back the principal amount to lenders,” said a top SBI official.

Industry insiders said the Ministry of Finance received as much as Rs 5,000 crore from awarding road projects, in the form of premiums, in the last four months. Experts questioned the viability of these projects. “The government might be happy now because of the money flowing in. But there is every chance that the projects may not be completed,” said the chief executive officer of a non-banking financial organisation.

K R Kamath, chairman and managing director of Punjab National Bank, which has an exposure of around Rs 2,000 crore in roads, is concerned. “We have worked out a clear repayment schedule for the principal amount in such projects,” he told Business Standard.

GMR group, which offered a hefty premium to bag the Kishangarh-Udaipur-Ahmedabad project, is confident of raising funds. A Subba Rao, chief financial officer of GMR Infra, said they are planning to achieve financial closure of the mega road project by the end of the current financial year.

“The company will soon float expression of interest for engineering, procurement and construction (EPC) contracts,” he said. The loan required is around Rs 3,500 crore for the project, which stretches over 555 kilometres. GMR offered around Rs 630 crore as negative subsidy (the premium amount) for the project.

While premiums are offered almost for all projects, experts said the last few bids had been very aggressive. GVK Infra had won a highway project in the Shivpuri-Dewas section where it would have to invest Rs 2,800 crore. It offered an annual premium of around Rs 181 crore.

Essel Infraprojects, a company of the Essel mining group won a road project in the Gwalior-Shivpuri section, after offering Rs 66 crore annual premium to the National Highways Authority of India (NHAI). “Projects which offer huge premiums, are likely to make losses for the first few years of operations, and bankers which fund these projects will have to take these losses into account. Huge premiums which are offered for some of the projects, can test their viability and hence lenders need to revisit their sector funding strategies and policies,” said Vishwas Udgirkar, senior director at Deliotte Touche Tomatsu.