Freeways aren’t free

The government’s recent proposal to shut down toll plazas on roads with investments of less than ₹100 crore under the public private partnership (PPP) mode may evoke a positive response from toll users.

But it will hit the lending and investment sentiment in the ailing road sector, which is starving for capital and awaiting policy and financial stimulus.

Such a move could question the robustness of concession-based contractual structures.

It could also obscure the economic rationale of such assets from a ‘return-expecting’ capital view point and reduce the investment and lending appetite in PPP assets, besides discouraging private participation in building public assets.

The proposal comes at an inappropriate time. The infra debt/bond market is just in its fledgling stages. The bond market for toll roads seems to be evolving and investment potential for performing toll roads seems to be on an upswing.

Investors — including mutual funds — are reportedly seeking to invest in infrastructure assets with different classes of risk profiles, which was not the case until now, as there was an appetite only for very highly rated debt instruments.

Infra-debt funds (IDF) are also considering investing in toll roads and refinancing the debt of performing toll roads. At this critical juncture, cancelling PPP projects would send wrong signals to the infrastructure debt market and thwart the vital debt-market link with the assets.

According to the government’s 12th Five-Year Plan, around 50 per cent infra investments are to be met by the private sector.

At this time, shutting down PPP toll projects would burden the government and the National Highways Authority of India (NHAI) with having to replace such a huge quantum of capital that would otherwise have been contributed by the private sector.

Besides, the annual maintenance costs, all other maintenance work on these roads will also have to be borne by the government, which could involve a significant outlay.

While the government may contemplate operate, maintain and transfer concessions to meet maintenance requirements, it will still have to bear the cost of construction and that would only make sourcing capital tougher.

For the projects proposed to be annulled, it remains to be seen, how the contractual obligations will be met.

To be fair, the move might provide temporary respite to lenders of projects wherein toll-collection was not adequate to meet their debt service requirements. They might recover a significant portion of their debt with some hair-cuts.

In case of under-performing toll roads which are stressed for debt service, lenders would reckon the debt outstanding including defaulted principal; however, it is possible to allow only the debt that would have been outstanding had the asset performed according to expectations.

That the lender may have to incur a hair-cut may leave the sector even more vulnerable to policy related uncertainties.

The writer is Director, India Ratings and Research. The views are personal

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