Govt Seeks Rbi, Hdfc Advice On Hedging Techniques
The ministry of surface transport has sought help from the Reserve Bank and the HDFC for working out hedging techniques for foreign direct investments in road projects.
Foreign investors in road projects had sought linking of annual tariff escalation to the rupee dollar exchange rate movement. But what the ministry has offered is linking of the tariffs with the whole sale price index (WPI) with cent per cent neutralisation. This means the annual increase can be fully passed on in the form of a tariff increase.
The only project that has indexed the escalation factor to the consumer price index is the Delhi- Noida bridge, promoted by the Infrastructure Leasing & Financial Services Ltd in which the Asian Development Bank (ADB) has taken an equity stake and is also one of the creditors.
Foreign investors had sought linking the tolls to the exchange rate on the grounds that the depreciation of the rupee could result in a severe reduction in their equity rate of returns. Currently the minimum rate of return on investment that has been offered is about 16 per cent which translates into an equity rate of return of a little over 20 per cent. However, this return could erode substantially if the depreciation rate of the rupee is much higher than the increase in the WPI. And this is precisely what some of the foreign investors have been arguing, as has been happening during the last few months.
The rupee during the last two years has suffered a depreciation of roughly 12 per cent, whereas the annual increase in the WPI is only about 5 per cent. But sources in the ministry say, that an internal analysis had shown that the depreciation of the rupee had matched the movements in the WPI. Accordingly the WPI was a comfortable cushion to base the annual tariff increases.
If the entire weightage is shifted to the exchange rate, then the tariff escalations would be too steep and could result in user resistance, the sources said.
However, MoST was prepared to take into account a small weightage on the basis of the exchange rate or alternatively work out hedging methods. These methods would be worked out after consultations with the RBI and the HDFC, the sources said.
The hedging costs could be treated as pass through especially in the larger projects where the traffic density is very high. In such projects, the impact of the hedging would be very minimal the sources added.