New Delhi: Desperate to get highway projects moving, the National Highways Authority of India (NHAI) proposes to provide working capital loans to contractors having trouble raising funds.
If it goes ahead with the proposal, the highways regulator will provide such loans on a case-to-case basis against bank guarantees furnished by the contractors. It will redeem the loans against payments due to the contractors after a project is concluded.
The loans will be given at 2 percentage points above State Bank of India’s prime lending rate (PLR), which is currently at 12.25%. PLR is the rate at which a bank lends to its most creditworthy borrowers.
Coming along: A file photo of a road being built in New Delhi. NHAI already makes advance payments to help contractors purchase materials. Raj Kumar / Mint
Projects developed on the so-called build, operate and transfer model, which account for a little more than one-tenth of the projects in the country, will not be eligible.
The proposal was discussed at a 7 March meeting between road contractors, the highways regulator and the ministry of road transport, among others, according to people present at the meeting. The proposal comes at a time when contractors, citing difficulties in raising project finance, are staying away from highway bids, or finding it difficult to continue work.
An NHAI officer, who didn’t want to be named, said the regulator will consider such requests “in light of the current scenario”. The highways regulator does not need any clearances to proceed because it is allowed to provide discretionary advances to contractors, the official said.
An advance will be made against targets that can be clearly monitored and only apply to the so-called engineering, procurement and construction contracts, where a private contractor completes specified work on a road and hands it over to the government for a fee. NHAI already makes advance payments to help contractors purchase materials to start a project. These advances, too, are typically redeemed at the time of paying the contractors.
Contractors have been complaining of difficulties in accessing project finance, despite several measures taken by the government to ease liquidity concerns that include a refinance window for banks lending to infrastructure projects. The Reserve Bank of India, the country’s central bank, has cut policy rates several times since October.
The government also agreed last year to revise upwards the costs of projects in which detailed estimates were made before 2007, to reflect current commodity prices.
In spite of this, the government’s plans to auction projects to upgrade or widen 60 stretches of highways has drawn little response. Contractors have stayed away from several auctions while others have received solitary bids.
The regulator has sought the Election Commission’s approval for auctioning 50 highway projects. “We have approached the Election Commission to let the process carry on,” NHAI member (finance) Didar Singh told an industry conference on Friday.
Since dates for the general election have been announced, government agencies need the commission’s approval before any auctions.
Another NHAI official, speaking on condition of anonymity, raised concerns on whether the regulator could lend money for working capital. “A working capital loan implies hypothecation of materials. There is no mechanism through which NHAI can keep track of these things,” said another NHAI official. “Also, how will you ensure that he (a contractor) would put it in this project? He may play the market or put it in real estate.”
Analysts said a cash infusion was ideal. “It’s a war-like economy. And a war-like economy is a command economy. At one level, in an era where cash is king, any cash injection helps,” said Siddhartha Das, national public-private partnership practice leader for audit and consulting firm Ernst and Young Pvt. Ltd. “Now, whether there is a risk that the money may be used elsewhere, I think that is a risk worth taking.”
PTI contributed to this story.