Building Confidence

Financial closures in the road sector

The financing scenario in the road sector has improved considerably in the past few years. With the emergence of various alternative means of funding, the market has become more flexible towards the road sector. That said, achieving financial closure for PPP projects has always been a challenge for developers. The scenario started improving with the launch of hybrid annuity model (HAM) projects, but the pandemic led to disruptions, which ma­de finding funds difficult for projects. There were delays in the financial closure of HAM pro­jects even before the pandemic. But the pandemic made banks even more cautious towar­ds lending to the infrastructure sector. Achiev­ing financial closure for PPP-HAM road projects has become difficult in the falling interest rate regime. The slow transmission of policy rate cuts to bank lending rates has squeezed the cash flow margins of developers.

A number of mid-sized players won HAM contracts due to the relaxed bidding criteria. How­­ever, strong sponsors such as Dilip Build­con and KNR Constructions were able to achie­ve financial closure for their HAM projects. Weak sponsors with constrained liquidity will face delays in achieving financial closure and, in turn, project execution. Some of the active lenders for HAM projects are the State Bank of India (SBI), Axis Bank, HDFC Bank, Punjab Na­tional Bank and ICICI Bank.

Growth in bank credit

Over the years, bank lending to the road sector has shown a mixed trend – increasing steadily till 2013-14, declining sharply till 2016-17, and picking up significantly in 2018-19. It fell again in 2019-20. The overall economic slowdown in 2019-20 made banks cautious towar­ds the infrastructure sector in general. The twin balance sheet problem, the lending freeze on PSUs due to regulatory tightening, projects being stuck in arbitration, etc. have led to ban­ks being averse to this sector. How­ever, the trend changed in 2018-19, with projects back­ed by strong sponsors being able to achieve financial closures, models such as toll-operate-transfer (TOT) reviving investor con­fidence, initiatives by the National High­ways Authority of India (NHAI) to remove pre-construction bottlenecks providing greater comfort to the lending community, etc. Despite the Covid-19 outbreak, there was a sharp pickup in bank credit to the road sector during 2020-21. The perception of infrastructure lending improved in the fourth quarter of 2020-21. Cube Highways’ loan tie-up with SBI for Rs 35 billion was the largest debt fundraising for 2020-21. The loan proceeds were di­rec­ted towards the acquisition of TOT-III.

Scenario in 2021

The year got off to a promising start, as in January 2021, 534 km of was constructed in a week, amounting to approximately 76 km per day. In the 22-day period between February 28 and March 22, 1,170 km was constructed, an average of 53 km per day.

However, later in the year, delays were cau­sed in road construction by the disruption due to the pandemic, which impacted work co­m­pletion after contracts were awarded. De­lays in a number of post-award processes, such as financial closures, appeared to be caused by the pandemic as well.

NHAI’s HAM project auctions experienced higher competitiveness in the first quarter of financial year 2021, as the bidder eligibility criteria were eased. Regional players accoun­ted for 33 per cent of the HAM projects granted. While their bids were not aggressive, fin­ancial closures and project executi­on remain­ed critical performance indicators in the later months.

Against the intended time frame, HAM project developers experienced an average delay of three to four months in obtaining financial closure. However, 37 per cent of completed projects, awarded between fiscal years 2016 and 2018, were mainly completed on schedule. On average, 55-60 per cent of these were completed six months ahead of plan, while the remainder fell behind.

In May 2021, 66 per cent of the projects awarded over fiscals 2019-21 were yet to commence construction and were awaiting financial closure and appointed dates. Under-construction projects faced labour issues following the pandemic.

As of October 2021, NHAI sought an extension on the deadline for financial closure and a waiver of the penalty for late filing of bank guarantees for road developers impacted by the Covid-19 localised lockdowns.

The authority requested an extension of two to four months, depending on the location, for concessionaires to complete financial closure on concession agreements concluded bet­­ween April and June 2021. Additionally, pe­nalties for late submission of performance se­cu­rities or bank guarantees were also requested for new contracts committed to between April and May 2021.

In the case of build-operate-transfer (BOT) and TOT contracts, the concession term was propo­sed to be prolonged in accordance with the ag­reement’s requirements in order to reduce user fee collection. Apart from extending the time for contractors to complete their obligations, direct payment to an approved subcontractor via an escrow account was also recommended.

For hybrid annuity and BOT contracts, it was proposed that performance guarantees be released on a pro-rata basis, as specified in the contract. This is if the concessionaire does not violate the contract. The second wave struck the country in April, wreaking havoc on the eco­nomy. Later, the union cabinet approved the Rs 6.29 trillion aid plan unveiled in June to bolster the pandemic-stricken economy.

With the exception of all pandemic-related economic changes, the projects that achieved financial closure include the Malur section of the Bengaluru-Chennai Expressway, the Aliga­rh-Kanpur Highway, the Jagdishpur-Faizabad se­c­tion of NH-330A, and the Meerut-Naziba­bad section of NH-119.

Future outlook

While the pandemic has disrupted activity ac­ross sectors over the last two years, the road sector has made exceptional progress in terms of national highway construction despite facing obstacles. Going forward, the Ministry of Road Transport and Highways (MoRTH) has identified projects that should be offered in 2022 under the Bharatmala Pariyojana and the National Highways general plan. NHAI’s second proposed infrastructure investment trust, following the successful first, will be worth app­ro­xi­mately Rs 25 billion-Rs 30 billion. Addi­tio­nally, as part of the PM Gati Shakti National Master Plan, MoRTH is working to develop an integrated multimodal national transportation and logistics network.

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