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India today boasts of one of the largest road networks in the world. The allocation of budgetary resources in the past by the Union Government has helped to finance road and national highway construction projects throughout the country. However, over the years, a growing demand for financial assistance from other sectors has resulted in a decline in budgetary resources available for road projects. Loan assistance from banks, international funding agencies and private sector participation have therefore played a major role in providing the much-needed financial support for these projects.

But now the highway projects have run into difficulties with the lending banks. Several projects have been stalled and it has become a challenge to reach financial closure. For instance, earlier this year, the National Highway Authority of India (NHAI) cancelled two projects due to their failure to reach financial closure. To prevent similar incidents in future, the government is keen on reviewing and revising the lending guidelines of these banks. The Finance Ministry and the Reserve Bank of India (RBI) have donned their thinking caps, in order to find a way out of this impasse.

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At present, all parties are following the Model Concession Agreement (MCA). According to this agreement, 90 per cent of the debt due is treated as a secure guarantee. This works because the companies can recover the debt amount through toll collections, etc. The banks can accept annuities and toll collections as sufficient securities, as they are government-backed. There remains, however, a hitch. If the concerned project fails to be implemented for any reason, the banks will be left with no securities and will be unable to recover the loan. Thus, a proposal to treat escrow accounts as collateral for these projects is under consideration.

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Escrow accounts are separate bank deposit accounts that are maintained by the lender and funded by the borrower, in this case the companies. The lender uses this account to make monetary payments like taxes etc. on behalf of the borrower. The Finance Ministry and the RBI are now mulling over the possibility of converting and treating these escrow accounts as security or guarantees for road projects, where the annuities or the annual sum of money paid to the lender are not backed by any government guarantee.

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The Finance Ministry also emphasised the need to secure projects and deal with any land problems prior to bidding. This is because any issue arising out of land acquisition after the bidding is over and the project is won, results in the stalling of the project. As a consequence, there is no means of repaying the loan.?

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The banks argue that lending money for these projects will increase the risk of bad assets in their balance sheets, if ever the companies start defaulting. The highway construction group insists that defaults from the road sector have been minimal, almost negligible. The Road Transport and Highways Ministry is keen to continue with the MCA guidelines as developed by the NHAI.

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There is thus a clash of interest between the lending banks, the construction companies and the Highways Ministry. It remains to be seen whether or not the proposal under consideration will be accepted and implemented in the days to come.

Source: http://indiatransportportal.com/2012/11/road-construction-hits-a-financing-wall/

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