The road sector has witnessed stressful financial times over the past four-five years. Lags and execution delays continue, making potential investors more cautious about committing funds to road projects. This is clearly reflected in the decline in the number of projects that have achieved financial closure recently. While the sector has reported a surge in activity in terms of project awards, project financing for build-operate-transfer (BOT) and hybrid annuity model (HAM) projects has been hard to avail of.
During the period January 2014-June 2016, only 14 national highway projects were able to achieve financial closure. This is a steep decline in numbers. As per the data released by the Ministry of Road Transport and Highways in July 2016, 14 road projects achieved financial closure in 2013 alone. While only seven financial closures were seen in 2014, the figure dropped further to five in 2015. During January-June 2016, only two projects, the Agra-Etawah bypass section widening project and the Delhi-Meerut Expressway, Package 1, were able to tie up funds. In terms of investment size, seven of the 14 projects that achieved financial closure after January 2014 had a debt component of about 60.75 per cent (Rs 98.85 billion) of their total project cost (Rs 162.7 billion). Data regarding debt financing for the remaining seven projects is not available.
While the National Highways Authority of India (NHAI) has stipulated a period of 150 days from the signing of the concession agreement to arrange financing for BOT projects, there has hardly been a case where financial closure has been achieved in time. Projects have usually taken about one or two years to arrange debt financing. There are very few that have closed financially within the stipulated year. For instance, the Yedeshi-Aurangabad road project in Maharashtra achieved financial closure in a span of seven months. The Shivpuri-Guna project in Madhya Pradesh and the Bikaner-Phalodi project in Rajasthan each took eight months to achieve closure.
Some of the projects that achieved financial closure after January 2014 had to be terminated/ foreclosed and then reawarded due to implementation issues. Meanwhile, there are projects which failed to achieve financial closure and had to be restructured and subsequently reawarded.
For instance, the Agra-Etawah bypass project in Uttar Pradesh was initially awarded by NHAI to Ramky Infrastructure Limited in November 2011 on the basis of the highest premium payable to NHAI. Ramky achieved financial closure in 2013. However, delays in getting clearances for the project led to its foreclosure in May 2014. It was eventually reawarded to IRB Infrastructure Developers Limited’s wholly owned subsidiary, AE Tollway Private Limited, in May 2015, and managed to achieve financial closure this year.
Similarly, the Hospet Chitradurga project in Karnataka, which is currently being constructed under Phase III of the National Highways Development Programme (NHDP), was foreclosed in December 2013. It was initially being developed by Ramky which managed closure in November 2012. However, in January 2014, NHAI terminated its contract with Ramky. Bids were reissued for the project on a BOT basis. However, NHAI had to cancel these bids as well, due to poor bidder response. Later, in March 2015, the project was reawarded to TRIL Roads Private Limited. The new developer managed to achieve financial closure for the project in December 2015.
The contract for the Shivpuri-Guna section, which was earlier a part of the Shivpuri-Dewas four-laning project in Madhya Pradesh, was also terminated and reawarded. The Shivpuri-Dewas section had been awarded to GVK Power and Infrastructure Limited by NHAI in September 2011. However, delays in obtaining clearances and the developer’s inability to achieve financial closure led to contract termination. Subsequently, NHAI invited fresh bids for the projects in three packages. The Shivpuri-Guna section (Package I) of the project was awarded to Ircon International in March 2015. The project achieved financial closure in December 2015.
Evolving terms and structures
The terms and structures with regard to debt financing in the case of BOT-based projects have also evolved over time. Till 2011-12, lenders would readily finance up to 80 per cent of the project cost, with the rest to be brought in as developer’s equity. However, post 2012, lenders have become wary of taking higher risk exposures in projects. Most of the projects financed in the past two to three years have been able to raise only 60 to 70 per cent of the total project cost as debt. The average cost of debt for projects that have recently achieved financial closure has been 11-12 per cent per annum.
One of the major reasons for this is that Indian banks have very stressed balance sheets at present. Banks already have high exposure to infrastructure projects and are holding a large number of non-performing assets (NPAs). According to the Reserve Bank of India’s Financial Stability Report, June 2016, the gross NPA ratio of the industrial sector as a whole rose sharply to 11.9 per cent in March 2016 from 7.3 per cent in September 2015.
During the same period, though the stressed advances ratio of the infrastructure sector declined to 16.7 per cent from 21.8 per cent, it continues to be very high. Rising debt burdens have also led developers to refinance the debt component of projects. For instance, in December 2015, Ashoka Buildcon Limited’s associate, Jaora-Nayagaon Toll Road Company Private Limited completed the refinancing of its debt of Rs 5.52 billion with the State Bank of India. Earlier, in August 2015, Shapoorji Pallonji Jammu Udhampur Highway Limited had refinanced its project debt by raising funds worth Rs 26.1 billion through bonds. After refinancing, developers have been able to reduce the interest costs of debt to about 10.75 per cent per annum, thus saving on interest costs and have extended repayment periods of loans. For instance, in April 2015, Ashoka Highways (Durg) Limited refinanced its debt worth Rs 3.63 billion with IDFC Limited. This led to an interest saving of 1.7 per cent per annum for the company. Meanwhile, Ashoka Highways (Bhandara) Limited also refinanced its Rs 3.24 billion debt with ICICI Bank and saved 1.5 per cent per annum as interest.
NHAI awarded 19 HAM-based projects during 2015-16 and 2016-17 (April-July). However, as of September 2016, only one HAM-based project has achieved financial closure. Even though NHAI gives 40 per cent of the project cost as a grant, it has been difficult to avail of debt financing. Given the BOT experience in the past, lenders are being cautious even while evaluating HAM projects. One of the reasons for lenders’ qualms is the fact that the developer’s risk exposure has shrunk further under HAM. Lenders believe that HAM is nothing but a modified engineering, procurement and construction (EPC) model with a deferred payment mechanism. The concessionaire is expected to bring in only 9 per cent (15 per cent of the 60 per cent project cost not financed by NHAI) of the project cost as equity. Further, lenders would also prefer compensation or termination charges, in case the concessionaire defaults, to be 90 per cent of the debt due, as in the case of BOT projects. Currently, HAM projects mandate a much lower level of compensation to lenders.
The way forward
In order to facilitate financial closures in the future, stakeholders need to look beyond banks for means of financing. While lenders continue to be cautious, they are looking at refinancing existing projects rather than financing new ones. Nonetheless, some lenders are considering funding HAM projects. Last-mile funding is required to aid the implementation of stalled road projects. Financiers are of the view that the BOT model will make a comeback as the EPC mode cannot function in isolation due to limited availability of public funds. Meanwhile, the central government has initiated a string of measures such as deferment of premium payments and a one-time fund infusion to boost investor confidence in the sector.
In spite of the government’s positive intent in addressing the portfolio problems of BOT assets, there is significant commercial stress, and only the renegotiation of concession agreements can be the possible remedy.