Increasing aggression in the corporate world to bag national highway development projects may spell doom for the sector as banks feel such competition would undermine feasibility of these projects, besides weakening companies? financial position in the long run.
Companies have recently offered to pay crores of rupees a year to the National Highways Authority of India (NHAI), which awards projects for construction of national highways, as premium.
Premium, or negative grant as it is normally called, is an amount to be paid by the concessionaire to NHAI. This is contrary to viability gap funding (VGF) that is generally offered by NHAI to bidders to make road projects attractive. NHAI offers up to 40% of total project cost as VGF, which means up to 40% of the project cost would be funded out of government money. This reduces financial burden on the concessionaire and the banking sector.
According to road ministry data, NHAI has awarded 16 projects this year. Of them, 12 were bid out on premium with a net present value of more than R15,000 crore. In June 2011, GMR Infrastructure won a contract to expand a 555-km stretch of the Kishangarh-Udaipur-Ahmedabad highway, offering the highest ever premium of R668 crore a year. The net present value of total amount paid over the 26-year concession period was R9,000 crore, more than the project cost of R5,500 crore.
Banks that FE spoke to said the high premium offered is not healthy for the sector as it would impact the cash flow of developers if their traffic or cost projections go awry. Some of them also hinted at increasing lending rates for such projects for taking high risk.
?There is an issue of aggressive bidding in highway sector. Premium being bid is very high and may impact the cash flow of concessionaires. This also raises questions on their capacity to service the loan,? ICICI Bank MD & CEO Chanda Kochhar said.
India Infrastructure Finance Company?s chairman and MD SK Goel said, ?We would do proper due diligence before financing projects. If the bids look too aggressive, we would either not give loans or increase our cost of lending?.
SBI chairman Pratip Chaudhuri said, ?If such bidding continues, the tenure of loan would have to be increased and the cost of loans would also rise.?
However, NHAI member (finance) JN Singh said, ?The bids in question were submitted by leading players and we don?t expect much problem there.?
Road secretary A K Upadhyay said, ?The bidders might foresee 10% increase in traffic per year while we would have expected 5% rise. So there is no cause of suspicion on their capability.?
