NEW DELHI: Private risk capital, which has stayed out of the highway sector since 2014, is finally returning to the sector. This follows the government’s efforts to raise the comfort level of investors in the latest set of amendments to the model concession agreement (MCA).
The changes in MCA provide for liberal construction support for projects, allow borrowing from non-bank lenders, and enhanced compensation if the tariff projections are not met. It also has buyback provisions by the National Highways Authority of India (NHAI), in certain conditions and enhanced liability by the government agency if the contract is terminated.
Other developments over the years like improvement of the finances of the developers, emergence of Infrastructure Investment Trusts, new models of monetisation like Toll Operate Transfer and rising global appetite of top global funds for revenue generating assets too have led to developers being more willing now to risk their capital.
“BoT is back in favour and has witnessed renewed interest from private players. In the last BoT project awarded by National Highways Authority of India (NHAI) 7 to 8 players have submitted financial bids as against 3 to 4 players in the past,” spokesperson for IRB Infrastructure Developers Ltd said.
However the industry is waiting for more lucrative projects to come their way. “Contractors are waiting to do some worthwhile work. After changes in the MCA the wait is for the new projects,” Director General of National Highways Builder Federation P C Grover said.
As against the 5% to 7% BoT award in the past several years, it is expected that the BOT pie of the awards will increase meaningfully, IRB said.
“Improvement of the balance sheet of contractors also supports the revival of interest in BoT,” group vice-president and sector head at IRCA Vinay Kumar said. He said that BoT projects that are open for bidding now have good toll revenue. Bids for 517.4 km of roads to be developed through BoT with the total cost of around Rs 30,975 crore are open.
The NHAI has prepared a pipeline of 53 projects of 5,214 km requiring an investment of Rs 2.1 trillion to be developed through BoT. Analysts say that projects in the pipeline can be successfully bid out in the next two financial years.
The Bharatmala Project is in limbo and the government is not coming up with new projects, he said. The awarding of new projects under Bharatmala, the flagship highway development project, has been suspended since December last year. The Bharatmala will be superseded by a Vision 2047 that seeks to develop 50,000 km of greenfield access controlled expressways.
During 2007 and 2014 only BOT was used for building highways. With the disputes and delays that the system ran into, the pace of highway construction slowed down considerably. In 2018-19 and 2019-20, no road concessions were awarded on the BOT model. As the private sector went out of the sector, the government’s spending increased from Rs 40,7789 crore in 2015-16 to Rs 2.64 trillion last year.
The interim budget had provided Rs 2.76 trillion for the sector. Apart from allocation from the budget the NHAI borrowed in big quantities from the market. When the NHAI debt soared above Rs 3 trillion the NHAI was barred from taking on more loans. By end of FY 24 the NHAI debt stood at Rs 3.35 trillion.
The revival of BoT will take the burden off the budget as it seeks to add 100,000 km of highways by 2030 for which Rs 50 trillion will be required. Of the total money required, Rs 25-30 trillion can come from the budget while Rs 20 trillion will have to come from the private sector. “This presents a big opportunity of Rs 15 trillion on PPP basis for players like IRB,” the company spokesman said.
As developers stayed away from BoT, the government came up with Hybrid Annuity Model (HAM) to keep their participation alive in the sector. In HAM the government agency gives 40% of the cost of the project and 60% has to come from the developer. The developer gets back his investment and a mark-up over it in annual instalments. The toll on HAM roads is collected by the NHAI which benefits from any increase in the traffic volumes and toll collections.
The developers now want to get that upside even if it involves higher equity commitment. In BOT all funds have to be invested by the concessionaire. In a typical project 30% of the cost is met from equity and 70% from debt. In HAM, the government agency gives 40% of the cost of the project and 60% has to come from the developer. So equity commitment of 30% of the 60% commitment from developers comes to around 18% of the total project cost.
“Toll projects offer linkages with the country’s economic growth and some inflation hedging. The possible upsides from these may make the projects attractive as compared to annuity projects,” director at Crisil Ratings Anand Kulkarni said.
Apart from cushions from the government, the maturing of Infrastructure Investment Trusts (InVIT) has opened up an opportunity for contractors to monetise their assets whenever they like.
“Availability of asset monetisation options through vehicles like InvITs also supports developers interest,” Kulkarni said.
There has been a proliferation of InVIT since 2019. Now the number of InVITs stands at over 20 and the road sector is their favourite asset. According to Crisil estimates last year the road sector cornered half of the Rs 1.3 trillion that flowed into InVITs and this year this figure can go up to 75%. So road developers using BoT get another exit option from projects. Government has already allowed change in ownership of a highway after one year of commercial operations.
Source: The Financial Express
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