India: Finding the way to fund highways

Mukund Sapre, executive director of IL&FS’s transportation networks unit, shares his views on recent reforms aimed at unlocking private funding towards new road infrastructure.

Infrastructure Investor: How do you view the government’s plans to review restrictions on Japanese and Malaysian export-import (Exim) banks willing to lend at preferential rates to domestic developers wanting to undertake Indian highway projects?

Mukund Sapre: While there is no present provision allowing for this yet, the Ministry is looking to permit such investment to revive at least those companies which are struggling with stagnating highway projects in hand. Similar permissions can also be sought for Chinese investment as part of the country's $20 billion commitment. Foreign institutions such as sovereign wealth funds, multilateral development banks, Exim banks, pension funds and insurance funds constitute a source of funding waiting to be tapped.

II: What difference does the central bank’s recent cap on banks’ Tier 1 capital available for long-term corporate bond subscription will make to liquidity in the infrastructure sector in India?

MS: The recent move on permitting bank cross-holding of bonds issued by other banks for financing infrastructure and affordable housing may see the issuing bank achieve greater success in its subscription of such instruments.

This is a reflection of the central bank's confidence in the issue as lenders are apparently interested in investing in projects where their exposure is protected, as in projects with assured revenue (annuity-based). This move will in turn lead to more confidence in fundraising through the bond route as up to 20 percent of the issue size can be bought by banks, subject to certain caps, which will eventually leave out lesser amount for the issuing bank to seek from other institutions.

Presently only the financing of annuity projects is secured via the bond route, with credit enhancement by foreign funding agencies. Financing toll-based projects may also be explored via bonds as with increased foreign investment the projects' credit rating can be improved. In addition to the traffic growth risks, clarity in government policy on toll collection as a continuing means of revenue will also help make toll-based projects attractive for the bond market.

An added attraction can be the ‘safety net’ of an assured revenue in toll projects. The government can provide a minimum collection for the developer and this may assuage concerns of lenders and bond investors regarding repayment risks.

The Hybrid Annuity scheme has drawn interesting provisions. Additionally, apart from revenue risks, it also covers interest rate fluctuations on borrowing by the developer and inflation risks during construction and later during operations. This model is expected to spell the revival of the sector and is eagerly awaited by participants.

Much of the success in drawing investment from Exim banks or other foreign lending institutions also depends on the government’s ability to provide a fillip to stagnating projects at hand. Recently the government permitted the full divestment by developers of their equity in a public-private partnership project after two years from its commissioning and extended it to projects awarded before 2009. This move is likely to free up much-needed equity for the developers which they can use to complete existing projects and take up new ones.

II: Who will be taking over these liabilities next to the government?

MS: There are many other developers who are interested in taking stakes in other projects which augment their presence in a specific region or location, whereby they can derive economies of scale. ITNL, for example, has been successful in selling half of our stake in the Gujarat Road Infrastructure Company Limited to MAIF Investments India Pte.

Likewise, there are other infrastructure funds looking to invest equity in such projects. In many of these cases, the concessionaire divests part of their stake only, and thereby, operational control and overall responsibility continues to vest with them. In case they wish to divest 100 percent of their equity, the new developer has to take on the overall responsibility of maintaining the asset as per the terms of the original concession agreement. The decision of a stake sale is routed through the authority, whose approvals are taken to affect the transaction.

II: What other state measures are likely to make a difference in unlocking the capital needed to build the country’s road transportation networks?

MS: The government has also proposed to provide a one-time loan to projects which have been stuck up due to the liquidity crunch in order to assist the private developer in completing the remainder of the project. The refinancing of existing debt in projects every five years for long term loans of 20+ years has also been extended to lenders. This is popularly known as the 5/25 scheme.

Developers have also been given the cushion of deferring their premium payments to the NHAI in order to improve their cash situation. This will enable higher availability of working capital during construction and clear their premium dues later on.

These measures, coupled with the successful passage of important legislation pertaining to the sector – such as the amendment to the Right To Fair Compensation and Transparency in Land Acquisition Rehabilitation and Resettlement (RTFCTLARR), popularly known as the Land Acquisition Bill, and the Road Transport & Safety Bill – and the proposed Public Contract (Resolution of Disputes) Bill, which the Finance Minister announced in his February budget, are an effort to simplify the dispute resolution and regulatory procedures. 

They are likely to see a rise in investor confidence in infrastructure and decrease credit risks associated with projects. With foreign direct investment in construction already permitted up to 100 percent, a greater involvement and investment of foreign funds is expected – including in the housing sphere – if these issues are ironed out.