In July, the National Highway Authority of India (NHAI) announced its plan to award at least 8 per cent of the targeted road development for the current fiscal through Build-Operate-Transfer (BOT) route.

In September, credit rating agency ICRA published its study of 120 BOT road projects that have defaulted during the last decade, which added ₹42,000 crore of NPAs (non-performing assets).

In October, the Enforcement Directorate (ED) attached ₹80 crore worth of assets of the promoters of Ranchi Expressway Ltd, which undertook the four-laning project of 163 km of highway between Ranchi and Jamshedpur, on the charges of fraud and money laundering.

On the surface, these three events appear unrelated. But, in reality, together they encapsulate the impact of public private partnership (PPP) on the banking system. PPP, which peaked in 2011-12, when nearly 95 per cent of projects were awarded under the BOT (Toll) model, lost its lustre due to a slew of unanticipated issues.

NHAI has been attempting to resurrect interest in the BOT model in order to alleviate the financial burden caused by the existing Hybrid Annuity Model (HAM) and EPC (Engineering, Procurement and Construction) contract model.

The study by ICRA has revealed that 70 per cent of the sample projects defaulted during the operational phase, largely on account of lower than envisaged traffic and authority-related issues. Only one-fourth of the projects could come out of default and nearly 16 per cent of the projects were terminated.

Many of the large infrastructure companies, which once dominated the BOT landscape, have either shut down or shrunk in size. Some of them are still being probed by CBI/ED for possible financial irregularities.

Fault lines of the past

Is the banking system, which has borne the brunt in the past, ready to embrace it again? When the attempts are being made to revive the model, it is pertinent to revisit the fault lines of the past and address the gaps.

Risk during execution stage: The ability of the concessionaire/sponsor to raise the requisite funding, timely availability of right-of-way and various approvals including environmental clearances, changes in design/scope of work, terrain conditions, local government or judicial interventions are just a few of the serious issues encountered at this stage of the project.

In 2012, the Bihar government cancelled all the mining licences, forcing the contractors to procure construction materials from the neighbouring States, which more than doubled the input cost.

Although NHAI protects the concessionaire against losses caused by delays in approvals and land acquisition, the delays will ultimately impact the project execution and its cash-flows. While NHAI’s Concession Agreement allowed partial toll collection (under certain conditions) if at least 75 per cent of the project stretch is complete, this was always delayed and, in some cases, there were restrictions on the utilisation of funds pooled into the escrow account, impacting the debt servicing.

The eventual outcome of this risk is cost-overrun. The concessionaires (SPVs) have attempted to mitigate the risk of cost overrun through a fixed price EPC contract with the counter-party, which is a group company (sponsor) in most cases. This fixed price contract also helped in building a strong financial model for securing the bank funding at project SPV level. This arrangement was a double whammy for the lenders having to face the brunt both at sponsor as well as SPV levels. With multiple BOT projects on hand, most of the sponsors found it difficult to infuse equity into these SPVs. An easy way was discovered through book entries showing upfront equity infusion into the SPV and immediate plough back of the same to the sponsor as mobilisation advance.

This means that the project has started with inadequate financing. With the fixed price contract denting the balance sheet at the sponsor level, banks started facing default at both the levels, leading to ultimate collapse of both the project and sponsor.

Risks after the operationalisation: The revenue shortfall has been one of the biggest challenges for the road projects. The traffic projections made in the absence of any reliable historical data, drawn based on certain assumptions, have largely been flawed. These projections and the financial models which formed the basis for sanction of debt have turned out be a piece of fiction, often leading to a quick mortality of a long-term loan.

Development of alternative routes and modes of transport like railways, changes in user profile due to changes in demographic and economic profile of the catchment area, local political conditions, force majeure risks like natural calamities, changes in laws, etc., are few variables that have impacted the revenue generation. Poor maintenance has led to the termination of the contract in some cases.

As evidenced in the ICRA study, there is a lower probability of a project reviving from the default stage. One of the major factors could be the shorter loan repayment period compared to a longer concession period — the loans were sanctioned for a period of 12-15 years vis-a-vis a concession period of, say, 25 years. This financing model has always put a strain on project cash-flows, leaving no room for operations to stabilise.

In the case of road projects, the traditional debt-restructuring mechanism did not work because it required a committed and sustained financial support from the concessionaire and the project owner. While a stalled road project is a loss proposition for all stakeholders (i.e., concessionaire, lender and project owner), the lender bears the lion’s share of the financial loss (nearly 75 per cent of the cost incurred).

Given the bloody past of financing the toll-based BOT projects, banks will look for answers to these questions before taking a plunge again.

The writer is a corporate banking professional with a leading private sector bank

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