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Funding The Highways

An active intervention and healing touch to smoothen capital flows to the beleaguered sector is the need of the hour

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There is no better way to improve logistics and cut back commercial transaction costs (particularly if we are to ramp up our manufacturing sector) than to bolster the national highway programme. The sector however, faces many challenges today. Trade protectionism, high crude prices and rising interest rates have pushed input costs (machinery, bitumen, mining leads) northwards, adversely affecting total project cost. As a result, the fund requirements for this sector are huge. The ambitious Bharatmala project requires about $50 billion for about 25,000 km. Cost and availability of capital have thus, become areas of supreme concern.

If 2007-2012 was a period of unjustified exuberance for PPPs, then the current scenario is one of understated pessimism. The asset-liability mismatch faced by banks – because deposit tenure does not match loan tenure – is compounded by the shadow of the NPA crisis. Banks are burdened with the Prompt Corrective Action stricture of the RBI. The key lament of highway developers today is that a large part of their time is currently spent, not in construction, but in pursuing bank officials for loans. As more infrastructure accounts move from liquidity issues to structural solvency issues, banks have practically eschewed lending to PPP projects. This is demonstrated by the fact that of the 109 Hybrid Annuity Projects that have been bid out (which already have the comfort of 40 per cent of the project cost being awarded in the beginning and the remaining 60 per cent reimbursed as assured biannual annuities over 15 years) only about half have secured financial closure till date. Not surprisingly, the current emphasis of tendering is on the public financing (EPC) mode.

In view of the limited budgetary support from the government due to competing claims from various other programmes and the imperatives of fiscal responsibility, a large proportion of the funds required will have to come from market borrowings. With rising interest rates, fund mobilisation becomes a challenge, both for government agencies and the private sector. Currency depreciation also adversely affects raising money from foreign sources. In the past NHAI had procured funds at @25-50 basis points above G-sec from the domestic market and successfully raised masala bonds. This is proving to be difficult. The ILFS debacle has further tightened the market for infrastructure funds.

On the operational side, apart from the omnipresent land issues, instability at the board level of prominent government parastatals and private infrastructure bodies has begun to adversely affect managerial effectiveness. It also causes delays, in the way of acceptance of arbitral awards without going in for expensive and time-consuming litigation in higher courts, change of scope of decisions, change of alignments, dispute resolution etc. These become poignant bottlenecks in an environment of a general credit squeeze.

Not surprisingly, the credit ratings of companies that are undertaking projects for the government, including the performance of stocks of listed companies on the bourses, is not as rosy a picture as it was a year ago. As it is, this sector countenances human resource deficits – paucity of sound third party auditors and sound middle-level management. When the mood falters, this problem gets accentuated.

What we require is a sectoral development finance institution, focused effort and definite managerial consistency. Companies that have overloaded order books or those that are highly leveraged, should reassess their capabilities and ability to take on new projects. An active intervention and healing touch to smoothen capital flows to the beleaguered sector is the need of the hour.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Raghav Chandra

The author is Former Chairman, NHAI

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