Boon or bailout? Builders of national highways can now offload projects to new investors

Developers of some 30 highway projects worth roughly Rs 30,000 crore that had hit a dead end are on the road again, thanks to a tweak in government policy last week. The modification allows promoters of these ventures — many of them cash-strapped and debt-laden — to bail out by offloading equity to interested buyers. The move, which did have its critics, has the potential to rejuvenate the cash-starved sector, and give a fresh lease of life to 30 projects that are stuck because of their inability to achieve financial closure. The government’s nod did not come easy.


Before the prime minister-headed Cabinet Committee on Economic Affairs (CCEA) cleared the norm, the Planning Commission had opposed the move saying that allowing highway builders to divest fully would tantamount to changing earlier bidding conditions. The government’s view is that the policy tweak will expedite implementation of road infrastructure and insulate the National Highway Authority of India (NHAI) from what it dubbed “unnecessary disputes” with private players; many of these companies had dragged the NHAI to court to get an easy exit. Yet, it’s not unreasonable to construe the policy change as a bailout for developers in distress.

After all, as the Reserve Bank of India had pointed out recently: “Investment in the road sector has collapsed in 2012-13, with scant interest in new projects, huge delays and poor execution in existing projects.” “Let’s not give it a negative connotation,” says Vinayak Chatterjee, chairman of Feedback Infra. “The government has finally recognised the reality prevailing in the road sector. The policy should have come earlier. In one stroke, it will allow equity churning to take place and remove some nonperforming assets (NPAs) in the financial sector,” he says. The build-up of these NPAs has made banks reluctant lenders to road projects — at least three-fourths of the cost of a highway project is financed via debt.

Chatterjee adds that a number of sovereign wealth funds such as Abu Dhabi Investment Authority and Singapore headquartered Temasek may consider picking up stakes in Indian highway projects. “Even Indian companies which sold out assets recently and have enough surplus may pick up completed projects for a steady income stream,” he adds on an optimistic note. News reports in April had suggested that cash-rich billionaire Ajay Piramal, who had sold a part of his healthcare business in 2010, may invest over Rs 1,000 crore in road and renewable energy projects. NHAI chairman RP Singh adds: “We expect more PE (private equity) interest in the highway sector now…I won’t like to disclose any name.” (See Foreign Companies Have Shown Interest).

Contours of Change

The government has, however, imposed a few conditions while allowing highway builders to divest their equity totally. The original rules were first diluted after the NHAI implemented the BK Chaturvedi panel report which in 2009 suggested that developers in some cases needed to hold merely 26% stake, and the rest could be offloaded. The latest norms, as approved by CCEA, will however allow developers to exit projects entirely at any stage, including when there is no financial closure of a project.

The new buyer, however, will have to be acceptable both to the NHAI and the lender. According to the latest changes, the lender first has to be satisfied with the credentials of the substituting entity before it is taken up by NHAI for scrutiny. Once the NHAI gives its nod, the final decision to permit substitution will be taken by the lenders.

Understandably, the new buyer will have to take the liabilities and obligations of the concessionaire towards the NHAI under the concession pact and towards the lenders under earlier financing agreements. Of the 30-odd projects that have failed to achieve financial closure, a few have run into environment and forests regulations. But in most cases the delay is the result of the developers’ inability to raise equity, which is a precondition for lenders to offer debt.

The government’s bet is that the policy tweak will facilitate cashstarved companies to raise fresh equity. “Once the companies raise enough equity, they will be able to borrow money from the banks,” says road transport and highways minister Oscar Fernandes. In the first week of his assuming office, the new minister was briefed by his officers about the rationale behind altering the policy.

The Opposition

Those opposing the exit proposal see only individual developers benefiting, perhaps at the expense of the sector itself. “The tweaking of the rules is to help those developers who aggressively bid for highway projects and have no cash in hand to execute them now. The recent policy change will further encourage irresponsible bidding in future,” says a leading infrastructure consultant who requests anonymity because he works closely with the government. The government had delayed the process of altering the policy for several months as there was a stiff opposition from the Planning Commission. The Plan Panel prepared a sixpage note to oppose the move, according to an officer who reviewed it. When contacted, no one in the Plan Panel was ready to come on record but one official explains why it had opposed the change.

“Where is the guarantee that a highway developer will bring back the money received by selling an earlier project to bid for new projects? And if there is a buyer for existing projects, why can’t he come straight to any new project? Why should we give undue advantages to private players?” he asks. Developers dismiss suggestions of a bailout. Says IRB Infrastructure’s chairman Virendra Mhaiskar. “Earlier too you could sell stakes up to 74%. The policy change is quite logical as there is no point forcing a concessionaire who does not have a controlling stake to retain 26% equity.” Mhaiskar adds that his company does not have any plans to sell stakes in the projects it is developing. A GMR spokesperson too said “the CCEA’s approval to help concessionaries divest their stake in projects is encouraging for the highways sector.”