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Raghav Chandra: Financing complexities for highways

Given the liquidity squeeze, there is a crying need for significantly better coordination between the RBI and the banks to fully support the government's highway development programme

Raghav Chandra 

Raghav Chandra

While it is debatable whether highways can be adjudged fundamental infrastructure, it is indisputable that competing end-to-end alternatives are of poor consistency. Subdued marketing of agricultural produce needs a unified agricultural market to permit seamless trading across geographies through an electronic portal. But, ultimate success rests on physical delivery of transacted commodities and for that good highways are imperative. Small and medium enterprises desperately need to reduce logistical costs to be competitive, and need to reach ports/final destinations to leverage their advantage. Good roads mitigate inflation. They are useful for better human development indices - health, social empowerment, justice, skill development, etc. Highways are also strategic support for defence and homeland security and help combat extremism. John F Kennedy truly recognised this when he said, "It is not our wealth that built our roads, but it is our roads that built our wealth."

In India we need to build roads, as of yesterday. Most developed countries built their highway network several decades ago. As indicated in the Budget through the higher allocation for highways, the present government is committed to convert all two-lane national highways (currently they constitute 75,000 km out of the total national highways' length of one lakh km) to four-lane or better and improve the network by awarding works for 10,000 km projects annually. While this will require intense effort on the part of the central government and its chief agency, the National Highways Authority of India (NHAI), it will also require proactive involvement of all the states to save time and reduce costs.

Most importantly, robust financing mechanisms will have to be in place for the now hugely expensive land acquisition and high-value construction which do not compromise on the basic but increasingly elaborate safety features/structures. This will require funds to the tune of several lakh crores of rupees over the next six-seven years. At least about 30 per cent funds or more should come from the private sector, which will thus have to be encouraged to participate for its life cycle efficiencies and design innovation. Most importantly, the cumbersome process of bank lending to the highways sector will have to become easy, consistent and dependable. For this, highways financing deserves priority sector status from the Reserve Bank of India (RBI), at least to the extent that other pre-designated priority sectors are not able to avail of priority quota.

Bank lending to the infrastructure sector is highly restrictive, particularly from the public sector banks that are reeling from the burden of enhanced provisioning for non-performing assets (NPAs). There is no exclusive development financial institution to support infrastructure. Private sector banks are being extremely fussy, asking for corporate guarantees from the promoters - even getting a performance guarantee is an effort for private developers given their weak balance sheets, leading to delays in financial closure. The biggest challenge for the private sector today is in mobilising equity for BOT (build-operate-transfer) projects. Even for the best of projects, developers find themselves stretched for equity. For project financing, we need to graduate from relationship banking to risk-based lending, where the intrinsic business/risk model of a project is considered, rather than the credit rating of the promoters.

The consortium banking framework and modalities are retrograde and slow - the lead banker is a leader only in name. There should be a defined protocol whereby the lead banker should be able to quickly bring the smaller participating lenders on board so that refinancing and restructuring decisions are taken smoothly. Also, there is need for strong technical evaluation and capacity-building in the banking sector for it to be reliable.

RBI schemes have not exactly flown. The 5/25 scheme for allowing banks to bridge the asset-liability mismatch due to the long tenure of highway projects requires practical relaxations to deal with cases such as where the aggregate outstanding is less than Rs 500 crore and to allow for longer tails in recovery. While the RBI has now clarified that it does not prohibit fresh loans to an NPA account, as long as suitable provisioning has been done, the banks are reluctant to allow NHAI's fund infusion linked with first charge for languishing projects, stating that it would also require provisioning forbearance from the RBI.

It would be helpful to review the threshold of 90 days of default for classification of a highway account as NPA and to raise the ceiling of 10 per cent of EPC (engineering, procurement and construction) cost for the funding of cost overruns. In exceptional cases, it may be necessary for banks to convert their debt into equity to facilitate sustenance of essentially viable projects that are currently stressed - for this the RBI should simplify valuation guidelines. Even though the NHAI has permitted securitisation of surplus receivables from commercially operational projects, banks are hesitant to permit raising of fresh debt to be used as quasi-equity for another project, quoting the RBI as a constraint.

Perhaps, highways equity funds, with possible funding from external funds and long-term lease/sale of completed and commercially viable highway assets can help redress the situation. Infrastructure investment trusts, too, have to be promoted, as that will allow developers to monetise their investments to participate in new projects, and also help bring in retail stakeholders in the highways sector.

The NHAI already has an exit policy for highway developers. It fully recognises the need to unlock domestic capital so that developers can pursue green-field projects. It has already hand-held the divestment of about nine special purpose vehicles to foreign-pension and infrastructure funds. Cube Highways and Mcquarie have begun to demonstrate that they can bring in global practices for operations and maintenance of highways. The NHAI plans to substantially improve the overall investment climate in the highways sector by further streamlining refinancing modalities. It encourages and invites new developers and investors, even to step into the shoes of existing developers who wish to unlock their equity and use it for developing new projects.

At this critical juncture, given the liquidity squeeze, there is a crying need for significantly better coordination between the RBI and the banks to fully support the government's highway development programme as a foremost national priority. The moment cannot be lost in debate.

The author is chairman of the National Highways Authority of India

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First Published: Mon, May 02 2016. 21:46 IST

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