Arranging funds for Toll-Operate-Transfer highway projects a challenge

Will the first bag of the National Highways Authority of India’s (NHAI) Toll-Operate-Transfer (TOT) projects face financial hurdles? If India Ratings and Research (Ind-Ra) is to go by, it will be a challenge for the bidders to source funds.

“Bidders for TOT projects may find it difficult to tie-up debt, as the debt tenor in India is typically 10-15 years. Also, such projects pose a huge refinancing risk, as the initial concession period is 30 years. Furthermore, with such long concession period, the Initial Estimated Concession Value (IECV) is bulky, requiring large debts and thus large interest payments, which would be a burden on the bidder during initial years until the project achieves significant ramp up in revenues,” opined Ind-Ra in its latest report.
 
However, a reduction in the concession period by five to seven years would bring down IECV, thus lowering the quantum of interest payments during initial years. A reduction in concession period would also help the concessionaire to mitigate refinancing risk to a certain extent.

Shubham Jain, Vice-President & Sector Head, Corporate Ratings said, “Players with access to low-cost debt will be at an advantage. The ability of the participants to generate high equity IRR would critically hinge on the cost of debt. Assuming that the cash flows are in line with NHAI’s estimates at 8% cost of debt the equity return would be around 12% while the ones with 9% cost of debt would earn a single digit return on their investments.”

According to Crisil Research’s report, the equity IRR of the first bundle of highways being auctioned would range between 12% and 13%.

Ind-Ra’s note also read that the predictability of cash flows for a horizon of 30 years is a daunting task, as toll revenues and operation and maintenance expenses may vary depending upon the economy, Wholesale Price Index and Consumer Price Index etc. The investors and the lenders will have to be a little cautious on this model for the first bundle of projects, so as to structure the debt in such a way that in initial years the return on equity is higher before debt payment. 

However, last month, CRISIL Research had shared, “A cluster of manufacturing industries and ports in Vishakhapatnam, Kakinada, Kandla and Mundra are expected to be the drivers of transportation demand. The economic corridor in the east coast is also expected to improve traffic potential in Andhra Pradesh.” 

“But the highway stretches in Gujarat are more attractive than those in Andhra Pradesh because of the presence of industrial clusters and consumption centres in the periphery,” said Prasad Koparkar, Senior Director of CRISIL Research.

However, CRISIL Research’s report added that the key risks to the bundle are the impact of Goods and Services Tax and alternate routes.

On October 8, NHAI had floated Request for Proposals for a bunch of nine highway projects. Now, it has extended bid submission of Toll-Operate-Transfer (TOT) projects by a month to February 8.

The first TOT bundle has nine operational highway projects in Andhra Pradesh, Odisha and Gujarat.

Of the nine projects, six are from Andhra Pradesh (National Highway 5) and balance three in Gujarat (National Highways 8A and 8B). The ones in the southern state are – Siddhantham-Gunduglanu (71.95-kms), Diwancheruvu-Siddhantham (49.04-km), Annavaram- Diwancheruvu (70.98-km), Ankapalli-Annavaram (88.53-km), Icchapuram-Narasannapeta (96.70-km) and Puintola-Icchapuram (64.40-km). The three projects from the western state are – Bamanbore-Garamore (71.94-km), Garamore-Samakhiyali (51.46-km) and Porbandar-Jetpur (115.64-km).

The government is likely to earn a minimum of Rs 6,258 crore from the 680.64-km of highways having a concession period of 30 years.