Funding options dry up for highway projects as they get lukewarm response

With 11 of the 21 public sector banks (PSBs) going under prompt corrective action, financing challenges have altered the scenario in the country’s roads sector. 

Funding sources are drying up and this has weakened the risk appetite of banks.

Some highway projects (road monetisation), for which tenders were issued in the recent past, received lukewarm response from developers, mainly on account of a credit crunch in the market.

Funding sources changed rapidly in the last two-three months, an official said, requesting anonymity.

Since April 2017, Allahabad Bank, Bank of India, Central Bank of India, IDBI Bank, UCO Bank, Dena Bank, Oriental Bank of Commerce, Indian Overseas Bank, Bank of Maharashtra, Corporation Bank and United Bank of India have been put under the corrective action framework. This has put curbs on their lending. As a result, highway companies are left with fewer banks from which funds can be availed.

So far as the toll-operate-transfer (TOT) projects are concerned, the response has been lukewarm as there is uncertainty whether these road stretches are profitable. 

“ToT is an asset monetisation programme and variations are bound to come up like in any other PPP project. Some of the factors which contributed to the variation are hopes of a traffic build out, ability to bring in efficiency in operations and synergy in the overall portfolio of private developers, among others,” said Jagannarayan Padmanabhan, director and practice lead, transport and logistics, CRISIL Infrastructure Advisory.

Padmanabhan added that the discount in which projects were bid in the second round of TOT will have minimal impact on the asset monetisation programme of the government. Cube Highways emerged the winner of the second lot of the road monetisation scheme by quoting a price of Rs 4,612 crore, much below the base price of Rs 5,362 crore set by the National Highways Authority of India (NHAI).

Adani Infrastructure, with a quote of Rs 3,675 crore and IRB Infrastructure (with Rs 2,718 crore) were the other bidders for eight road stretches offered under the second round of TOT projects. 

WHAT IS THE TOT MODEL

• Under the TOT model, the concessionaire pays a one-time fee upfront, operates toll for 30 years
   
• The right to collect toll on some national highway stretches built through public funding is auctioned
   
• The concessionaire is also responsible for the operation and maintenance of the roads during the tenure
   
• TOT is applicable to EPC and the BOT (annuity) highway projects

“For the second round of bidding, one needs to see it as a mismatch between what the authorities expect as value and what the bidders think is due. One explanation for this could be that the NHAI is basing its expectation on one-year bidding contracts that happen during the interim period before projects are given out on a TOT basis. These one-year contracts see aggressive bids and should not be considered as a base,” said Jayant D. Mhaiska, vice-chairman and managing director of MEP Infrastructure Developers.

According to an expert with CARE Ratings, there is interest for road monetisation, but each time the level of interest and the bid value will depend on what kind of assets have been put out for sale.

Commenting on the other two category of projects – Engineering, Procurement, Construction (EPC) and Hybrid Annuity Mode (HAM) – CARE Ratings said it expects a fall in the award of projects during FY19 compared to the previous year. 

But EPC will be the preferred mode of award till there is buoyancy in the fund raising environment and bidding appetite of developers.

The ratings agency expects financial closure of 75 per cent-80 per cent among the pending HAM projects over the next three months. This may, however, come with relatively stricter terms in order to increase working capital requirements for EPC contractors. 

“Based on our analysis, 69 per cent of the debt of operational toll road projects, out of the total debt of around Rs 49,000 crore for sample projects, is at low cash flow risk. This is because of a growth in toll collection, reduction in interest rates, refinancing of existing loans with longer tenor and premium deferment by the authorities,” the CARE report added.