“The
provision made by RBI to consider the special rights provided under concession
agreement to lenders making the loan as secured lending are important and
lenders have to ensure that these critical rights are available to them while
considering financing of PPP road projects.”
As
per the RBI guidelines, banks classify their advances as secured and unsecured.
RBI defines an advance unsecured when realisable value of security is not more
than 10 per cent of outstanding advance. Here, the security is defined as tangible
security which does not include intangible like guarantee, comfort letters etc.
When an unsecured advance turns NPA, the bank has to make additional
provisioning (as compared to a secured NPA advance) of 10 percent at the
initial stage of Sub-Standard classification and which increases to 100% when
the asset class deteriorates to Doubtful categories.
In
the above background financing of road infrastructure projects appears to be an
interesting subject. Most of the road infrastructure projects are floated by
NHAI or State level agencies under Public Private Partnership (PPP) model.
These projects are based on competitive bidding under various models like BOT,
DBFOT, ANNUITY, HAM, OMT etc. The projects are awarded for long term concession
period generally ranging from 15 to 30 years by way of Concession Agreement
under which concessionaire gets the rights to use all the project assets during
concession period.
Generally
when capital intensive projects are developed, tangible assets are created and
which are provided as security to the project financing banks. However, in road
projects the developer is provided a long term concession period to construct
the road and maintain & manage it during the concession period. At the end
of the period, the assets revert to the project authority. Hence, a peculiar
situation arise where no major tangible assets rests with the project
developers which can be auctioned by lenders to recover their loans in case of
default by the developer in repayment of loans granted for construction of the
road project. In these projects, there are no project assets which can be
mortgaged to the bank. In order to safeguard interest of lenders, necessary
provisions are made in the Concession Agreement that allows substitution of
project concessionaire by banks in case of default under the financing
documents. The Concession Agreement allows banks rights to receive
annuities/toll collection from the assets, and which can be hypothecated/assigned
along with others rights, movable assets and current assets.
RBI guidelines provide that in such PPP
projects, the advances can be considered as secured to the extent assured by
the project authority in terms of the Concession Agreement, subject to the
following conditions:
a) User
charges/toll/tariff payments are kept in an escrow account where senior lenders
have priority over withdrawals by the concessionaire;
b) There is
sufficient risk mitigation, such as pre-determined increase in user charges or
increase in concession period, in case project revenues are lower than
anticipated;
c) The lenders have
a right of substitution in case of concessionaire default;
d) The lenders have
a right to trigger termination in case of default in debt service; and
e) Upon termination, the Project
Authority has an obligation of (i) compulsory buy-out and (ii) repayment of
debt due in a pre-determined manner.
In all such cases, banks must satisfy
themselves about the legal enforceability of the provisions of the tripartite
agreement and factor in their past experience with such contracts.
India
has second largest road networks in the World. The Govt. of India has target to construct 65000 Km of
National Highways by year 2022 at the investment of Rs.5.35 lakh crore. The
Govt. has stated to boost corporate investment in road and infrastructure
sector projects and encouraging banks/FIs/FDIs for supporting the sector. The
recently introduced Hybrid Annuity (HAM) model of developing road projects has
received good acceptance by developers as well lenders considering the grant
upto 40 percent in the form of annuity payments of the project bid cost from
NHAI during construction stage. The remaining 60 per cent is paid by NHAI after
project completion based on maintenance performance & quality, in the form
of semi annual annuities over the concession period. Therefore, the sector
provides at attractive business opportunity for lenders. The provision made by
RBI to consider the special rights provided under concession agreement to lenders
making the loan as secured lending are important and lenders have to ensure
that these critical rights are available to them while considering the PPP road
financing projects.
Disclaimer: The
views expressed in the article above are personal views of the author and should
not be thought to represent official views, ideas, or policies of any agency or
institution.
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