With bankers somewhat wary of lending to the roads sector, after a clutch of projects was derailed, not a single project awarded by NHAI (National Highways Authority of India) via the hybrid annuity model route appears to have achieved financial closure. The NHAI is understood to have awarded eleven road projects till March 31, 2016 via the hybrid annuity route, a mechansim where the NHAI assumes the responsibilities of acquiring the land, estimating the traffic and collecting the toll and the concessionaire takes on virtually no risk.
NHAI rules stipulate financial closure needs to be achieved within 150 days of signing the concession agreement. However, given their mixed experience with the BOT model, banks and financial institutions are evaluating the applications cautiously, sources said.
The concerns of lenders stem from the small equity risk that the concessionaire is taking. Given that 40% of the project cost comes as a grant from NHAI, the concenssionaire’s equity contribution is reduced to just 15% of the remaining 60% of the project cost or effectively 9%.
Lenders feel this is too small pointing out the promoter has virtually no skin in the game.
A senior public sector bank executive told FE, several large banks have indicated their reluctance to lend to hybrid projects if the promoters’ equity is effectively just 9%. “This is too small a commitment on the part of the promoter and none of the proposals from developers has been closed yet,” the executive added.
Indian Infrastructure Finance Company Limited (IIFCL) is among the institutions evaluating the new projects under the hybrid model. “While the requirment for equity from the concessionaire has been diluted, we are satisfied if the funds from either NHAI or the developer are released in keeping with the physical progress of the project. The ministry has agreed to this so we should be able to close out a couple of projects soon,” Sanjeev Kaushik, deputy managing director, (IIFCL) said. “The money is needed in the early stages of construction, ” Kaushik explained.
Banks also believe the compensation or termination charges, in the event of the concessionaire’s inability to complete a project, should be 90% of the debt due, as it is in the case of a BOT project. Currently, the rules for hydrid annuity projects stipulate a far lower level of compensation to the lenders which is worrying them.
Lenders are also concerned that the interest payable by NHAI, on loans taken by the developers, is too low. The rules stipulate the interest be fixed based on the bank rate plus a spread of 3%. Both IIFCL and bankers have suggested to MORTH, the interest be benchmarked to the the base rate of State Bank of India (SBI) or the average base rate of five banks plus a 3% spread. The ministry, is however, unlikely to agree to this demand.
Among the developers who are willing to construct roads via the hybrid route is MEP Infrastructure which successfully bid for three projects. The firm is a first-time developer of roads and Jayant Mhaiskar, VC & MD, MEP Infrastructure, said the company is on track to achieve financial closure for two projects by October. However, Mhaiskar added some lenders were requesting changes to the terms and conditions. “This is taking time and delaying closure,” he said.
The hybrid annuity model was introduced by Nitin Gadkari, minister for road transport, highways and shipping, in early 2015 to revive private sector investment in the roads sector by re-allocating risks. Under this model, the governemnt collects the toll and pays the developer a biannual annuity for recovering investment and interest costs and fee for operations and maintenance. In the build-operate-transfer (BOT) model, the developer absorbs most of the risks—financial, operations and maintenance and revenue.The ministry of road transport and highways (MORTH) failed to get any bids for at least 21 projects worth Rs 27,000 crore between fiscal years 2013 and 2014.
Lenders were expected to be comfortable with the hybrid model since the toll revenue streams, to service the debt, would be inbuilt into the framework. However, lenders remain wary of developers defaulting on the construction of the roads and want more collateral.
Since the onus of collecting the toll — a politically sensitive task — is no longer on the developers and they are also not required to estimate the traffic, hybrid projects were expected to take off quickly. Over the last few years the government has come to the aid of developers by reschedulding the premium payable by them to NHAI so as to ease their cash flows. Moreover, it has also permitted them an early exit through the substitution route to free up capital. Further, it has de-linked environment and forest clearances, making it easier for them to start construction.