NHAI to overhaul concession pact to entice developers back to BOT toll model for highways

P Manoj/Venkatesh Ganesh MUMBAI | Updated on August 29, 2019

PMO rap hastens re-think on project structuring and models

The National Highways Authority of India (NHAI) is overhauling its model concession agreement as it prepares to revert to the Build-Operate and Transfer (BOT) toll model after the Prime Ministers’ Office (PMO) ticked off the highway development agency questioning the financial viability of road infrastructure and the ballooning debt pile-up.

“The NHAI will go back to the BOT toll model with many changes to the model concession agreement to make it more attractive to private investors and lenders,” said a government official briefed on the plan.

“What NHAI is trying to do is that there are many loopholes in the existing concession agreement, implementation was not correct, that was one of the reasons why the BOT toll model became unattractive to investors and lenders. NHAI is trying to simplify all those things to make it more practical; the entire concession agreement is under process of amendment,” the official said, asking not to be named.

The planned amendments, he said, will cover right of way, land acquisition, conditions precedent, among 40-50 clauses. NHAI has suggested the changes which is under the consideration of the Road Transport and Highways Ministry. Continuous deliberations are going on which is expected to conclude soon. Probably in a month’s time, it will go to the Cabinet for clearance, he said.

Referring to the financial position, the official said that NHAI has a debt of some Rs 1.95 lakh crores including about Rs 20,000 crore borrowed since April this year out of the Rs 75,000 crore sanctioned by the Union Budget.

“The borrowings plans are finalised after due deliberations including at the level of the finance ministry; then only it is pencilled into the Union Budget. Per se, NHAI can’t raise a single pie without the authority/permission from the government,” he said adding that “it is a well deliberated borrowing which takes care of the debt servicing obligations as well”. “NHAI has never defaulted on servicing the debt,” he said.

NHAI funds road construction costs primarily through budgetary support such as a portion (Rs 16,000 crore for FY20) of the fuel cess collected for the Central Road and Infrastructure Fund (CRIF), toll plough-back and toll-operate and transfer (ToT) plough-back and borrowings.

“But, NHAI’s expenditure in a year for road construction is much higher than what it gets from the government,” he said.

“The government’s expectations on raising money through the ToT should also be tempered down,” he said.

“We cannot replicate that kind of success (seen in the first bundle of ToT) for every package. If we have a reserve price, we should achieve that reserve price at least. We might get a 10-15% premium, but it cannot be 150-200% premium all the time,” he added.

Credit rating agency ICRA Ltd said that road developers “shied away from BOT (Toll) projects” due to stressed balance sheets, forcing NHAI to shift to the Hybrid Annuity Model or HAM (wherein NHAI has to fund 40% of the cost upfront and remaining 60% over a period of 15 years) and EPC (wherein NHAI has to fund 100% upfront). As much as 92% of the awards over the last few years were through EPC, increasing the financial burden on NHAI from Rs 75,385 crore in March 2017 to Rs 1.78 lakh crores in March 2019.

“Given the ambitious targets of the Bharatmala program, NHAI will have no option but to raise the mix of BOT (Toll) awards,” says Rajeshwar Burla, VP and Associate Head, Corporate Ratings, ICRA.

“The risk sharing is not balanced in the current BOT (Toll) model. In the current form, it may not have many takers. Achieving financial closure also would be a challenge. It is time to devise a new model on the lines of BOT (HAM) to reduce the upfront equity contribution for private developers to an extent. Also, the new model should have provision to re-negotiate contracts to protect the returns of developers in case of lower-than-anticipated traffic performance especially given the challenges in traffic forecasting on account of likely shift to other competing and alternate modes such as dedicated freight corridor and inland waterways,” Burla added.

Published on August 29, 2019

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