In an environment of economic despondency, projects in the transport sector have notched remarkable success. Twelve projects worth around Rs 5,000 crore, awarded to private developers have gone into financial closure and construction has started.At least three projects (two ports and one road project) are to be ready for commissioning next year.
The real challenge before each of the projects has been financing. Although the financing structures differ slightly, each project has used the deferred payment route under a build-operate-transfer structure, which aims at cost recovery through tariffs. Barring one, all projects have funding limited to the project's cash flows with varying support mechanisms providing comfort to lenders. Some of the innovative structures:
lDurg bypass project: In a deal structured by SBI Capital Markets, the debt repayment is supported by the National Highways Authority of India. The NHAI support mechanism will come into the picture in case the debt service coverage ratio (revenues to debt servicing) is one.
lCoimbatore bypass project: Promoted by engineering major Larsen & Toubro (L&T), the concept of "takeout financing" was used for the first time in this project. This structure allows financiers to exit from the project loan, without recalling the loan. HUDCO, which has extended Rs 35 crore ten-year money has got into an arrangement with a series of banks (including SBI and the Indian Overseas Bank), to take over the outstanding portion of the loan from the fifth year.
The problem in funding such projects has been providing physical asset cover. FIs' term loans are linked to physical asset cover to the extent of 1.5 times the value of the loan. Since NHAI cannot provide such covers and promoters are reluctant to absorb projects onto their balance sheets, FIs have not been able to participate in a big way.
On the other hand, state road projects have sailed over this hurdle with their governments providing physical asset cover, as in the case of the Bangalore Mysore Expressway corridor.
Yet, the story is not so cheery in large projects. About 77 projects are to be open for bidding early next year after the finalisation of the concession pact. Some nagging issues relating to tariffs and technical details relating to the state support agreement and the Motor Vehicles Act remain. So the promoters are reluctant to get involved in large projects using tolls as a method of cost recovery, unless there is a system of guarantees like traffic guarantees. Other methods like shadow tolling are yet to take off.
In the ports sector, investor interest has been more focused on setting up full fledged ports in the state maritime sector or in operating container terminals. Ports currently have two core revenue streams _ vessel related tariffs and cargo related tariffs. Cargo-related projects cannot be funded by foreign funds since the Tariff Authority for Major Ports does not permit cost recovery through forex-linked tariffs.
Therefore, foreign investors like the Australian P&O and Ports Authority of Singapore have preferred containerisation projects. Such projects tend to be attractive, because container handling charges are levied in foreign currency equivalents and are treated as vessel related charges.
However, in state port projects, private sector interest has been overwhelming. Gujarat Pipapav Port and Adhani Port, funded exclusively by domestic FIs will soon be operational. P&O is also expected to set up the Vadhawan Port in Maharashtra costing $1 billion. International Seaports of Singapore has tied up with L&T for Dhamra Port in Orissa.
Tomorrow, the third part of this series will focus on financing of power projects.
