CCEA Approves Exit Route For Road Projects

The Cabinet Committee on Economic Affairs (CCEA) has approved the proposal to ‘facilitate harmonious substitution of concessionaire (road contractors)’ in ongoing and completed national highway projects. This is expected to expedite the implementation of road infrastructure in the country and insulate the National Highways Authority of India (NHAI) from heavy financial claims and unnecessary disputes.

This has come to pass on the back of underachievement in the previous year, where a very ambitious target of awards was set. Unfortunately, the response under the PPP was quite a downer. No response was received in respect of many projects even after repeated bid invitations. In addition to the overall economic downturn, the changes in policy guidelines relating to environment and forest clearance have also had an adverse impact. A large number of projects awarded during 2011-12 are yet to achieve financial closure. Apart from this, developers are facing severe shortage of equity and consequently are unable to raise the required debt. Hence, the poor response to PPP projects.On the other hand, there are many investment companies with sufficient resources that have expressed interest in acquiring road projects, but are either unable or unwilling to take up the construction risks. Permitting buyouts by such entities, which will take over all obligations under the concession agreement, will help facilitate the flow of resources for the revival of the road sector. Such buy-outs would help in completion of the projects, which are currently languishing due to financial distress.This is proposed to be made applicable both for:

1. Already awarded projects that have achieved the appointed date
2. Projects to be bid out in the future, as per the prescribed mechanism.

We, at Dalal Street Investment Journal, are of the opinion that the proposal seems to intended towards the revival of the sector. If executed in the right way, this should provide much-needed impetus to the Indian infrastructure sector. Many approvals are needed and hence, the process would still be quite lengthy.

That infrastructure companies are in a tight situation is evident from the fact that the maximum lot is trading near the 52-week low levels. Some of the companies have already started selling their non-core assets and few have sold stakes in their respective SPVs. Despite resorting to these options, though, these companies are not yet out of the woods. Thus, we feel that this is a step in a right direction as it would provide a way for many debt laden companies to raise finances. Of course, the results of the same would be seen only in the long term. We expect companies like IVRCL, GMR Infra, GVK Power Infra and IRB Infrastructure to get benefited.