Infrastructure projects may get loan relief3 min read . Updated: 17 Nov 2008, 12:05 AM IST
Infrastructure projects may get loan relief
Infrastructure projects may get loan relief
New Delhi: The Union government is considering a proposal to subsidize loans for infrastructure projects offered through public bids, by effectively capping interest rates and absorbing the cost of higher rates in its own books.
The proposal was prompted by the reluctance of companies to bid for new projects, especially roads, against the backdrop of volatile interest rates. Borrowing costs are a key factor in the internal rate-of-return calculations for companies looking to bid for infrastructure projects, which typically have a 7:3 debt to equity ratio. Spending on public works is key to boosting growth in India’s now slowing economy.
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“The Planning Commission and finance ministry are considering various options. One of them is that the government can give an undertaking that if PLR (prime lending rate) goes beyond a certain point, we can take take care of that," said a senior official at the ministry of road transport and highways, who didn’t want to be named.
The official said the plan was in a preliminary discussion stage and that the Prime Minister and the finance ministry would take the final call on it. The possible impact of such a move on government finances couldn’t immediately be ascertained.
If the proposal is implemented, companies will be reimbursed for the additional payments they incur because of any increase in borrowing costs after the projects are awarded.
A Planning Commission official, who also didn’t want to be named, however, denied there is any such formal move. The commission has held in the past that compensation to companies should be through user-charges linked to changes in the Wholesale Price Index—the most popular measure of inflation.
The discussion comes at a time when several infrastructure projects that are being bid out to the private sector are finding fewer takers.
“Naked fear is the all-prevailing sentiment in the market," said Parvesh Minocha, managing director of engineering and project management at Feedback Ventures Pvt. Ltd, a project management consultant. “Capital is scarce, costs have gone up. Some of the projects are comparatively unviable and also some of the existing developers’ earlier projects haven’t achieved financial closure. In today’s environment, many developers are saying they only want cash contracts, because working capital requirements are the same for both (projects based on public-private partnerships, or PPP, and cash contracts) but returns come much later for PPP projects."
A Wall Street Journal story published in Mint on 13 November noted project financing costs had soared because of rising interest rates and that banks were reluctant to lend, threatening to roil the development of a raft of infrastructure projects.
“There has been a loss of confidence. It is understandable but not warranted," K.V. Kamath, chief executive and managing director of ICICI Bank Ltd, India’s second largest lender by assets, said at the India Summit of the World Economic Forum on Sunday. “Fear psychosis has been so dramatic between August and now."
Indeed, the National Highways Authority of India, or NHAI, the country’s highway regulator, last week extended bid deadlines for several projects after it failed to receive sufficient bids. In some instances, company officials say on condition of anonymity, it was because of the volatile interest rate scenario that would directly affect the profitability of the projects.
After the NHAI decision, the bids for highway stretches in three states and totalling a combined 306km, estimated to cost Rs2,561.64 crore, are now due in the last week of this month. The authority may extend deadlines further in increments of seven days if needed, according to NHAI officials.
Of the five projects, deadlines for two stretches of National Highway 47 in Kerala, estimated to cost a combined Rs1,115 crore, have been pushed back twice with bidders unwilling to invest in a state where, according to NHAI officials, revising tolls is difficult. A similar concern dogs projects in Bihar.
The deadline extensions come even as the country’s Rs314,152 crore road building programme is already being stalled for a variety of reasons, including litigation against bid guidelines and questions on the viability of the projects.
Confirming that the authority had not received bids for a number of projects, an NHAI official, who did not wish to be named, said the highway regulator is hopeful of receiving some bids by the end of November.
Of the 27 highway stretches for which initial bids have been received and evaluated, 16 are left with less than five bidders each. That was after companies withdrew from bidding to comply with a rule that essentially caps the number of initial bids a company can make at eight, in order to allay concerns of possible cartelization.