NHAI to try out project-based funding for road development

P Manoj Mumbai | Updated on September 19, 2019 Published on September 19, 2019

Move aimed at de-risking balance sheet

The National Highways Authority of India (NHAI) will try out project-based funding for building highways under the engineering, procurement and construction (EPC) route as India’s highway development agency looks at newer ways to take debt off its balance sheet.

“Project based financing is something which we are looking at,” Ashish Sharma, Member (Finance), NHAI said at a road show organised by the Authority in Mumbai on September 9.

“Till now, financing for NHAI was at the corporate level; project-based financing is something which we have not tried. Now, for some of the signature projects, we are looking at this mode also. This is one of the key initiatives we are moving forward with,” Sharma said.

NHAI, the world’s second largest highway network manager, is targeting 4,500 kms of highways in FY20.

Long-term financing

Project based funding refers to long-term financing of infrastructure projects based on its projected cash flows rather than the balance sheet of its sponsor. The financing is typically secured by all of the project assets, including the revenue streams.

The debt and equity used to finance the project are paid back from the cash flow generated by the project. Project financing is typically non-recourse in nature wherein the project sponsor/borrower and shareholders of the borrower have no personal liability in the event of loan default.

As much as 92% of the highway construction over the last few years were through the EPC route (where NHAI has to fund 100% cost upfront), increasing the financial burden on NHAI from Rs 75,385 crore in March 2017 to Rs 1.78 lakh crores in March 2019, eliciting a word of caution from the Prime Ministers’ Office (PMO) last month.

Project based funding will require a highway stretch to be packaged as a NHAI-sponsored special purpose vehicle (SPV) which will borrow funds from the market to construct the facility and repay the loan. The EPC contractor will merely construct the highway and hand it over to NHAI which will operate, maintain and collect tolls from the users to recover the cost.

SPV structure

“Under the SPV structure, one company will own a particular road stretch (compared to NHAI owning all the assets) and the funding is based on the traffic density on that road. This will give stake holders a better idea of project level data and granular details, enabling NHAI to focus more on a particular project, whether the project is viable and what is the cash flow required to make it viable. It also allows NHAI to prioritise projects for implementation. Otherwise, it gets lost in a very large balance sheet,” said Mohit Kumar, senior vice-president at IDFC Securities Ltd.

“NHAI overall has a lower borrowing cost being a sub sovereign entity, but at the SPV level the borrowing cost goes up slightly compared to NHAI raising debt at the corporate level,” he added.

The Union Budget has authorised NHAI to borrow Rs 75,000 crore in FY20 to build highways. This will be done through a mix of long-term borrowings from banks, Life Insurance Corporation (LIC) and Employees Provident Fund Organisation (EPFO), masala bonds, monetisation of toll receipts and infrastructure investment trusts or InvITs.

NHAI is awaiting cabinet approval to set up its own InvITs that manage income-generating highway assets, typically offering investors regular yield and a liquid method of investing in infrastructure projects.

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Published on September 19, 2019
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