What alternative financing models can Indian roads sector look for?

In the absence of a deeper corporate bond market, the Indian roads sector will have to look at alternative financing models to attract more investments.

India’s road sector, which requires massive investments is moving on a slow lane due to a lending squeeze by banks, coupled with recent slowdown in economic activity. Between fiscal 2016 and fiscal 2019, NHAI has awarded 6,670 km under 119 Hybrid Annuity Model projects, but only 70-75 per cent of the length awarded during that time have achieved financial closure, according to CRISIL.

Ratings agency India Ratings and Research in a comparative study of the key structural risks prevalent in infrastructure financing in the roads sector in India has analysed select projects in the US, Europe and Latin America.

Sops to toll road projects

Arijeet Maji, Senior Analyst, India Ratings and Research has pointed out that in the US and Latin America, flexible term concessions have been used in some toll road projects. This concession term is linked to the total aggregate revenue of a project reaching a predefined net present value-based threshold.

Concessions come into the play as a private company enters into an agreement with the government to have the exclusive right to operate, maintain and invest in a project. In India, concession period is granted for 15 years from the commencement of the project.

In Europe, a few toll road projects have variable concession agreements, with an option for term extension to help the developer recover higher capital expenditure incurred in the project. For some European toll road projects, concession agreements also allow for capital expenditure recovery through specific toll rate increases.

Also, there are some key differential features observed in certain toll road projects under specific schemes, in the US, Europe and Latin America. Subordinate debt, which is a form of an unsecured loan, could be considered like in projects where up to 10-30 per cent was provided by the grantor to the developer for mitigating high traffic risk exposure.

Another option is the minimum revenue guarantee, wherein the grantor usually pays a minimum fixed portion of the annual toll revenues to the concessionaire during the contract term to offset traffic under-performance is a part of infrastructure financing in those markets.

Then there is the shadow tolling mechanism, wherein toll amounts are collected per vehicle, which are paid by a third party such as a sponsoring governmental entity and not by the user. Some projects follow a hybrid structure- a mix of shadow tolling and user-payment tolling.

Public Private partnership

India Ratings has suggested that enhancing public private partnership by exploring other variants of build, operate transfer (BOT) models such as subordinated debt, shadow toll payments. In addition to existing alternative structures (like infrastructure investment trusts), stakeholders may also explore the possibility of setting up a dedicated secondary market for infrastructure road financing, and ensure the availability of multiple debt structures (deferred principal payments, bullet debt issuances) along with securitisation structures (collateralised loan obligations, toll road securitisations), to achieve low cost financing and a diversified investor community for Indian infrastructure road assets.

Additionally, a deeper bond market and a speedy resolution of distressed assets for the Indian infrastructure sector under the Indian insolvency regime would improve overall investor sentiments in the roads sector. Recently D J Pandian, Vice President and Chief Investment Officer of Asian Infrastructure Investment Bank had told BusinessLine that there is a need for a deeper corporate bond market to aid the country’s infrastructure plans.

Indian road project financing in India Ratings’ portfolio is largely via bank loans, while bond issuances are limited. Additionally, structural features such as bullet debt issuances, deferrable principal repayments or terminal value payments (in concession agreements) backed bond issuances are unpopular, noted India Ratings.

Overseas investors hold just 3.7 per cent of $835 billion of sovereign bonds.

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