Banks Scrutinized over Lending for PPP projects

The role of banks in Public-Private-Partnership (PPP) projects such as the Delhi-Gurgaon highway project and the Airport Metro express line project is under scrutiny due to continuing disputes between the associated parties. As has been alleged by government sources and industry observers, banks  have extended loans to Special Purpose Vehicles (SPV) of private firms implementing such projects, the amount of which is higher than the government estimated cost. As a result, banks risk the possibility of the projects getting canceled during its course, due to various reasons.

Projects under Scrutiny:

An instance of such a scenario can be cited in the case of the Delhi-Gurgaon toll road project, which is currently shrouded in controversy. The reason for this stalemate is due to the fact that the lenders, primarily IDFC, did not get prior permission from the National Highway Authority of India (NHAI) before lending extra funds to the developers of the project. Another such instance is in the case of the Airport Metro line  project that was awarded to Reliance Infra’s SPV, namely Delhi Airport Metro Express Pvt Ltd. In this case, lenders, primarily Axis Bank, had provided a loan for Rs 2,200 crore against the security of a government-approved debt of Rs. 1,247 crore. However,  the lenders did not obtain the government’s permission for the extra loan extended. With Reliance Infrastructure, now having withdrawn from the project, the bankers stand to lose as a result.

This move by the lenders that included IDFC as well as four public sector banks, was slammed by the NHAI chairman for the refinancing loan extended by them against a huge government debt of Rs.1,600 crore, without taking into consideration the termination payment. The outstanding debt of HUDCO, the original project lenders as of March, 2013 was Rs. 131.1 crore, compared to the Rs. 1,552 crore of IDFC and the other lenders.

Banks to maintain caution:

It was also felt that caution should be maintained by banks when handling escrow accounts, into which revenues generated from projects are accumulated. What is startling in the case of both the projects under scrutiny is that funds were siphoned away from the escrow account by the promoters in the form of inter-corporate deposits. Based on his experience gained from participating in a infrastructure project finance workshop in Malaysia, President of Corporate Strategy, Srei Infrastructure Finance, commented that making project finance norms more stringent was the need of the moment. Currently, there was a strange practice that was prevailing in the project finance system in India, with higher loan amounts disbursed than what was actually incurred by the project developers.

Differing viewpoints regarding contribution of banks to projects:

There were differing views put forward with regards to whether banks should disburse more funds than the project cost that was fixed by the government. Commenting on this aspect, an official of the Road Ministry stated that it was essential to ensure that the total project cost (TPC) fixed by the government was similar to the sum generated through bank loans as well as the equity funds pooled in by the developer. However, according to the opinion of an NHAI official, in cases where the project sponsor’s liability was limited, banks should be allowed to go ahead with lending more than the government’s TPC. The TPC of the government is calculated based on inputs like wholesale inflation, while banks arrive at the projected cost of a project by employing retail inflation numbers.

To arrive at a consensus for the project cost calculated by the government and that arrived at by project developers would be cumbersome, with variations of 10-15% generally expected. Moreover, in cases where the amount disbursed by lenders is more than that fixed by the government, the lenders should be ready to bear the brunt of this decision without expecting the government to act as a cover-up for the lender’s liability, that exceeds the TPC calculated by the government. As stated by the RBI Deputy Governor, due to the over-reliance on debt for funding projects, the leverage of infra companies has been high. As a result, there has been minimal inflow of equity into infrastructure project funding.