The National Highways Authority of India (NHAI) is seeking “flexibility” from the Cabinet in structuring toll-operate-and- transfer (ToT) projects as banks and private operators strike discordant notes on the asset monetisation model, which is beginning to show signs of strain over financing issues.

India’s highway development agency currently offers ToT concessions for 30 years, wherein, the right to collect toll revenue is auctioned to the highest bidder.

Need for flexibility

“While there are suggestions that we should reduce and bring it down to 15 years, there are also suggestions to keep it at 30 years itself. Nevertheless, we have moved a note seeking more flexibility, because in the earlier Cabinet approval, 30 years was the fixed tenure. While we feel that we may retain the 30-year tenure itself, but at NHAI we need some flexibility in what can be offered for a particular bundle. That is one of the changes we have proposed,” Ashish Sharma, Member (Finance), NHAI, said at a road show organised by the Authority in Mumbai last month.

Private investors insist that 30 years would be “a very optimal tenure” because longer term concessions will always get better value as the probability of recovering cost through tolls increases, said an executive with a global highway operating company.

Cost of capital

“If NHAI wants the best price for the ToT bundle, then, very clearly, the Indian cost of capital is much higher than the international cost of capital. My cost of capital will be 12-13 per cent, if L&T IDPL is bidding. So, we will give you less money for the same ToT bundle. If it is the Canada Pension Plan Investment Board (CPPIB), their cost of capital is 4-5 per cent and they will give you much more money for the same bundle. From NHAI’s perspective, the lower cost of capital is always going to earn you more money. Therefore, 30 years is a very good tenure,” Shailesh Pathak, CEO, L&T IDPL, said at the road show.

NHAI has extended the deadline twice for submission of bids for the third bundle of ToT highways at the request of bidders who have sought more time to undertake due diligence and get lenders to back their bids.

“Constraints in the financing sector is a big issue,” said the India head of a global infrastructure investor with interests in highways. “Banks are asking for sponsor support, which we are reluctant to give,” he said.

Long-term lending

Banks say 30-year funding will create an asset-liability mismatch.

“Banks may not give a 30-year loan straight away. We don’t have 30-year funding on the liability side. We can re-finance after 5-7 years. After that we can either continue or get a new lender,” Rajnish Kumar, Chairman, State Bank of India, India’s largest lender, said at the road show.

“If there is aggressive bidding for ToT, we will ask for sponsor support or that kind of thing. NHAI should also reconcile to the fact that if it is all about maximisation of value and money, then the financing issue can crop up,” Kumar added.

“From the banks’ side, 20 years is a good tenure or NHAI can offer the project for an initial period of 20 years, which can be extended by another 10 or 20 years,” said an executive of HDFC Bank.

Projects on offer

The financial closure for the first ToT bundle just scraped through, while the NHAI called off the auction for the second bundle as the highest price bid was below expectations.

NHAI’s Sharma said the size of the bundle was another area of concern to investors. “On the one hand, the opinion is that we should not reduce the size, but there are many Indian investors who feel that we need to have a smaller size so that they can also participate,” he said.

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