Easy exits to release Rs 4,000 cr to road developers: India Ratings

Govt has permitted 100% equity divestment after two years of completion for all BOT projects, irrespective of year of award

Easy exit options for completed road projects will release Rs 4,000 crore to developers, which can be ploughed back in infrastructure projects or used to retire debt, India Ratings and Research (Ind-Ra) said today.

The government decision allowing road developers to fully exit their equity investment for all projects after two years of construction could come as a breath of fresh air to the highway sector and provide opportunities in mergers and acquisitions, it said.

The report follows the Cabinet Committee on Economic Affairs (CCEA) last week permitting 100 per cent equity divestment after two years of completion for all BOT (build, operate and transfer) projects, irrespective of the year of award.

"Ind-Ra estimates that out of the 86 completed projects equivalent to 5,200 km that have been completed under public private partnership, around Rs 40 billion (Rs 4,000 crore) of additional residual equity can be released under the proposed divestment scheme," Ind-Ra said in a statement.

"Prior to the current policy direction, the possible equity divestment could have been around Rs 110 billion (Rs 11,000 crore).

Ind-Ra expects these measures to give a boost to weak sponsors in about 20 projects, it said, adding that this could de-stress and release the equity, helping them shore up their balance sheets.

"The current move by the government is a push to the infrastructure sector, which had stalled projects worth Rs 8.8 lakh crore, or 7 per cent, of GDP as of December 2014," it said.

"However, many project bids prior to 2009 had sponsors' aggressive traffic expectations, partly due to the then better prevailing economic growth conditions. Hence, investors may evince interest selectively on projects with strong year-on-year traffic and revenue growth."

Players in multiple verticals will benefit since the funds released can be used in non-NHAI (National Highways Authority of India) projects and power projects.

Cash-strapped developers burdened by a high debt servicing cost will also now be able to use funds to retire debt.

It said some of the recent projects indicate the inability to hike toll rates, especially for concessions 100 per cent linked to wholesale price inflation.

Considering the prevailing low inflation scenario, the potential benefits of the growth in traffic numbers could be eroded, it said adding, in the event of a drop in toll revenue impairing the debt service, the sponsor support may be required".