The National Highways Authority of India (NHAI) has started experimenting with its funding approach as it looks to secure finances for future projects. The authority’s plans are in sync with its goal of attracting multiple investor segments.
“Our target is to reach out to investors in every segment, be it a large investor, or small. Therefore we have several options in project execution from BOT, HAM, EPC and TOT,” an NHAI official said.
"Build-Operate-Transfer or BOT is for the concessionaires which have the appetite to take the traffic risk," he added. The Hybrid-Annuity model is for construction players who require hand holding from the government in the form of equity infusion, engineering, procurement and construction (EPC) and Toll-Operate-Transfer is for investors that are only keen on taking revenue risk.
“This is an important move as after a point of time, toll cannot be the only source of revenue. So if they are experimenting with their funding options it is a good idea,” a senior road ministry official said.
Rating agency CRISIL in a recent report said the government’s ambitious hybrid annuity model (HAM) of road construction had developed some "cracks" as smaller developers were finding financial closure of projects, tough.
In the hybrid-annuity model, the government pumps in 40 per cent of the total equity in the project. This model was launched in 2016, which expedited road construction schemes and resulted in execution of a large number of projects.
"In the past three-and-a-half years, the HAM of road construction has grown substantially, but some warts are now showing up: smaller developers are finding financial closure elusive, and over-aged projects awaiting appointed dates are facing termination risk," CRISIL said in its research report.
When the road transport and highways minister joined office in May 2019, in his second stint, he announced that the government would execute road projects on BOT or build-own-operate mode in the current fiscal. The reason behind the same is believed to be the drying up of resources for constructing EPC projects, which are completely funded by the government.
Experts are also of the view that the funding exercises are better for future NHAI projects.
“This is a welcome step and looks like it has been done keeping an eye on the future,” said Peeyush Naidu, partner, Deloitte India. He added that when the public private partnership structure changed, policies and funding should be in sync with it.
Some experts also feel at this point that the authority is left with no choice but to innovate in terms of financing.
“The government should either pump in more funds in NHAI or allow them to raise money, in the absence of both it will have to innovate with its financing,” former road secretary Vijay Chhibber said.
On November 20, the Cabinet Committee on Economic Affairs approved amendments proposed in the Toll Operate Transfer (TOT) Model by NHAI. Public funded National Highway (NH) projects which are operational and have toll revenue generation history of one year after the Commercial Operations Date (COD) shall be monetized through the TOT Model. The monetization will be subject to approval of the Competent Authority in Ministry of Road Transport and Highways/NHAI on a case to case basis.
Around 75 operational NH projects have been identified for potential monetization using the TOT Model, and bundled into 10 separate bids to attract economics of scale for the private sector.
NHAI has already monetised one bundle of projects under TOT model, generating a revenue of Rs 9,681.50 crore for the government.
However, the second bundle saw deviation in the market valuation of assets from NHAI’s valuation.