The Coimbatore Bypass Road Project

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Financing of the Project

In the 1970s, the Tamilnadu government planned the Coimbatore bypass road to ease the traffic congestion in Coimbatore and the NH-47 between Salem and Cochin. However, due to paucity of funds, the project had to be dropped. In 1995, the Government of India (GoI) liberalized its policies and opened up the road sector for private investments. In September 1995, the GoI through its Ministry of Surface Transport (MoST)5 invited tenders from the private sector to finance and implement the construction, operation and maintenance of the Coimbatore bypass road project on BOT (build, operate and transfer) scheme. As the project was not viable on its own, the GoI after studying the various options, widened the scope by including the construction of an additional two-lane bridge on river Noyal on the NH-47. A concession agreement for the integrated project of bypass and a bridge at Athupalam on NH-47 was signed on October 3, 1997 between the MoST, the government of Tamilnadu and L&T.

L&T set up a special purpose vehicle (SPV) - L&T Transportation Infrastructure Ltd. (LTTIL), to implement the project. L&T held 100% equity in LTTIL. LTTIL implemented the project on BOT basis, with the revenue accruing directly to it. The project was constructed by L&T-ECC (Engineering Construction Corporation) group, the largest construction organization in India. L&T-Ramboll Consulting Engineers, a joint venture between L&T and Ramboll of Denmark, was employed for quality control supervision and review of the critical pavement design. The project was financed by share capital of Rs 416 mn and term loan of Rs 620 mn, with a debt-equity ratio of 1.5:1. As per the agreement with the Tamilnadu government, L&T had to hold a minimum equity of 26% at the end of 30 years⁶.

The debt financing was done by State Bank of India (SBI), L&T Finance, Housing and Urban Development Corporation (HUDCO), Housing Development Finance Corporation (HDFC), and Industrial Development Bank of India (IDBI). IDBI had sanctioned Rs.300 mn for the project in the form of infrastructure bonds. The loan was given in two tranches of Rs.150 mn each at 15% interest each. Principal repayment was to begin from the eighth year onwards. SBI loaned Rs.300 mn to the project. Infrastructure Development Finance Corporation (IDFC) had structured a "liquidity support" arrangement to help SBI in emergency situation. This support enabled SBI to approach IDFC for refinancing in case it failed to raise the money from other sources. For IDFC, liquidity support was different from the take-out financing⁷ since it was lending on condition that the bank was unable to raise the money. Moreover, IDFC would not take the project risk even if it lends to the bank. IDFC would only be carrying the bank risk as it had given the money to the bank and not the SPV.

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5] MoST decides the policies regarding the transportation sector, while National Highways Authority of India (NHAI) implements these policies.
6] In the concession agreement signed between MoST and L&T, the government allowed the project promoters to bring down the equity to as low as 26% during the operational phase. However, the financial institutions insisted that the equity dilution below 51% will be permitted only after full repayment of debt dues.
7] A take-out financing agreement involves three parties - in this case, IDFC, SBI (or a participating bank), and the project company. The debt funds were provided by SBI for five years at the end of which SBI had the option to either continue or call back the principal. IDFC at that point would take-out SBI for the principal amount of the loan. The project companies therefore were able to avail themselves of longer tenure funds of over 10 years. Banks could assume full credit risk, partial credit risk or no credit risk in the initial period, with the variable being the interest premium. In this structure, both the bank and the IDFC would be able to participate in the credit risk for principal and interest respectively. This structure could enhance the flow of investments from commercial banks to the infrastructure projects. The other projects to be financed through takeout financing were Bharati Telenet, and Narmada Bridge in Gujarat.