The road transport and highways ministry is exploring how to provide credit guarantee to special purpose vehicles (SPVs) floated for highway projects to enable them raise cheap debt from pension and insurance funds. Once the proposal is crystallised, the ministry will take up the matter with the finance ministry and the Planning Commission.
Infrastructure funding in India has reached a level where banks are close to hitting their exposure limits and are willing to finance only high-return projects at rates ranging from 11% to 15% for 10-15 years. But, infrastructure projects need funds for up to 25 years. Companies say the cost of loans is increasing gradually because of tight credit policy adopted by the Reserve Bank of India (RBI). The central bank has raised interest rates 10 times since March 2010, forcing banks to hike lending rates.
Road ministry believes credit guarantee could be a potent tool for facilitating flow of low-cost money to the highway projects from risk-averse pension and insurance funds.
?Road sector projects are executed through SPVs that are new entities and don?t meet the prescribed standards for funding. Hence, to bring investment from pension and insurance funds to SPVs, it will be necessary that some sort of credit guarantee is given,? road transport and highways minister CP Joshi told FE. ?We are exploring various possibilities in this regard,? he said without giving details.
National Highways Authority of India (NHAI), the agency that awards projects to construct national highways, currently gives a conditional guarantee that in case of termination of contract due to default by the private company, the latter would receive up to 90% of project debt as termination payment. However, the facility is not available if the company is unable to pay off the debt while operating the highway.
The government is working toward allowing larger infrastructure investment by insurance and pension funds to meet the estimated requirement of $1 trillion in five years to March 2017.
In this direction, the finance ministry had on June 24 issued guidelines for setting up of infrastructure debt funds, which will raise money from foreign and domestic insurance and pension funds to invest in infrastructure projects. However, these funds could refinance only those projects that are in commercial operations for at least one year. New projects still have to raise funds from banks and other financial institutions in normal course.
?The government?s step is in the right direction as it will free up funds in the banking system. But bank money is expensive and for short term. The government needs to address the issue of non-availability of funds from insurance and pension funds for new projects separately,? SREI Infrastructure Finance Limited?s chairman and managing director Hemant Kanoria said.
Infrastructure companies said credit guarantee would help but the low returns in road and highway construction sector could still be an obstacle.
?Just like private equity funds, insurance and pension funds need more returns to safeguard their investments. The government should simultaneously do something to make road projects more remunerative for the investors,? a senior official in Gammon India said requesting anonymity.
Kanoria said returns in road projects currently go up to 25%, depending on the sound due diligence on cost and traffic estimation.
