When it comes to rekindling the interest of private risk capital in greenfield infrastructure ventures, no amount of effort by the government seems to suffice. The latest set of tweaks to the concession terms for the long-moribund build-operate-transfer (BoT) highway projects allow the government to pitch in, with half of equity finance, and up to 40% of the entire project cost. That means balance sheet monies to be put in by the private investor could be as low as 15% of the project cost, given the typical 7:3 debt-equity ratio for long-gestation highway projects. Non-banking finance companies can now be lead lenders to such BoT projects, and private developers will be party to negotiations for any debt refinancing required during the cost recovery period. If these weren’t enough for the private investors to shed their inhibition, the revised model concession agreement (MCA) also offers them the comfort of “compensation,” for revenue shortfall from traffic undershooting projections. That leaves almost nothing for the investors to desire for, but the question is, could such BoT concessions be called “pure-play” public private partnerships any longer?
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The modified MCA comes at a time when over half of the projects under implementation or being awarded by the National Highways Authority of India (NHAI) fall under the hybrid annuity model (HAM) devised in 2016. The HAM model was an offshoot of the “twin balance sheet” problem that scared away private investors from large greenfield infrastructure projects. The government contributes 40% of the capital costs of HAM projects upfront, and the balance 60% is paid by it as annuities over the life of the project. The remaining projects being implemented are conventional EPC contracts that are funded entirely by the government. Under both these models, the ultimate liability lies with the taxpayer.
In January this year, the NHAI came up with a plan to award 53 high-traffic density corridors of 5,214 km length worth Rs 2.1 trillion under the BoT model and bids for projects worth around Rs 35,000 crore were invited. Response to these projects has been lukewarm. To be sure, of the projects awarded under Phase 1 of Bharatmala, BoT share is barely 1.5%. Apparently, the government felt impelled to redesign the model to the extent of undermining its basic trait, because it saw no signs of risk capital flowing into the sector. The government must guard against its infrastructure financing policies becoming ad hoc. There is a definite risk of the current set of policies unwittingly dampening the risk appetite among potential investors. The issue of over-dependence on HAM cannot be addressed by bringing in another version of it.
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When it comes to rekindling the interest of private risk capital in greenfield infrastructure ventures, no amount of effort by the government seems to suffice. The latest set of tweaks to the concession terms for the long-moribund build-operate-transfer (BoT) highway projects allow the government to pitch in, with half of equity finance, and up to 40% of the entire project cost. That means balance sheet monies to be put in by the private investor could be as low as 15% of the project cost, given the typical 7:3 debt-equity ratio for long-gestation highway projects. Non-banking finance companies can now be lead lenders to such BoT projects, and private developers will be party to negotiations for any debt refinancing required during the cost recovery period. If these weren’t enough for the private investors to shed their inhibition, the revised model concession agreement (MCA) also offers them the comfort of “compensation,” for revenue shortfall from traffic undershooting projections. That leaves almost nothing for the investors to desire for, but the question is, could such BoT concessions be called “pure-play” public private partnerships any longer?
The modified MCA comes at a time when over half of the projects under implementation or being awarded by the National Highways Authority of India (NHAI) fall under the hybrid annuity model (HAM) devised in 2016. The HAM model was an offshoot of the “twin balance sheet” problem that scared away private investors from large greenfield infrastructure projects. The government contributes 40% of the capital costs of HAM projects upfront, and the balance 60% is paid by it as annuities over the life of the project. The remaining projects being implemented are conventional EPC contracts that are funded entirely by the government. Under both these models, the ultimate liability lies with the taxpayer.
In January this year, the NHAI came up with a plan to award 53 high-traffic density corridors of 5,214 km length worth Rs 2.1 trillion under the BoT model and bids for projects worth around Rs 35,000 crore were invited. Response to these projects has been lukewarm. To be sure, of the projects awarded under Phase 1 of Bharatmala, BoT share is barely 1.5%. Apparently, the government felt impelled to redesign the model to the extent of undermining its basic trait, because it saw no signs of risk capital flowing into the sector. The government must guard against its infrastructure financing policies becoming ad hoc. There is a definite risk of the current set of policies unwittingly dampening the risk appetite among potential investors. The issue of over-dependence on HAM cannot be addressed by bringing in another version of it.
Private investments are robust in a host of infrastructure sectors like telecom, seaport services, airports, and renewable energy. The situation is not satisfactory in thermal power sector because large corporate groups and fund houses are constrained by ESG (environmental, social, and corporate governance) norms. In sectors like highways and railways, absence (lack of feasibility) of market-determined pricing of the services is a dampener. But a certain mandate could still be accorded to the private investors even in these sectors, by earmarking certain remunerative areas and short-gestation projects to them. Monetisation of brownfield assets is a way to harness private funds and risk-averse patient capital. The NHAI has made some headway on this front by raising `1 trillion so far (including over `40,000 crore in FY24), helping unlock Budget funds for priority projects.
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Bumps on the road: New BoT terms for highway construction may throw pvt investors into risk-aversion mode
17
3
08.04.2024
When it comes to rekindling the interest of private risk capital in greenfield infrastructure ventures, no amount of effort by the government seems to suffice. The latest set of tweaks to the concession terms for the long-moribund build-operate-transfer (BoT) highway projects allow the government to pitch in, with half of equity finance, and up to 40% of the entire project cost. That means balance sheet monies to be put in by the private investor could be as low as 15% of the project cost, given the typical 7:3 debt-equity ratio for long-gestation highway projects. Non-banking finance companies can now be lead lenders to such BoT projects, and private developers will be party to negotiations for any debt refinancing required during the cost recovery period. If these weren’t enough for the private investors to shed their inhibition, the revised model concession agreement (MCA) also offers them the comfort of “compensation,” for revenue shortfall from traffic undershooting projections. That leaves almost nothing for the investors to desire for, but the question is, could such BoT concessions be called “pure-play” public private partnerships any longer?
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The modified MCA comes at a time when over half of the projects under implementation or being awarded by the National Highways Authority of India (NHAI) fall under the hybrid annuity model (HAM) devised in 2016. The HAM model was an offshoot of the “twin balance sheet” problem that scared away private investors from large greenfield infrastructure projects. The government contributes 40% of the capital costs of HAM projects upfront, and the balance 60% is paid by it as annuities over the life of the project. The remaining projects being implemented are conventional EPC contracts that are funded entirely by the government. Under both these models, the ultimate liability lies........
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