Awards in HAM assets have significantly dried up, the main reasons being delay in promised land acquisition by NHAI and large lead times in obtaining other regulatory clearances.
Source: Equirus Capital
“Average land acquisition costs have spiked from Rs 9.2 million per hectare in FY14 to Rs 23.8 million per hectare in FY18,” says Vijay Agrawal, Executive Director, Equirus Capital. This has created a lot of funding apprehensions where banks are insisting on releasing funds only after the majority of the land is available. He also points out that developers have submitted aggressive bids for HAM projects and have won many more projects than they can finance.
Public-sector banks, clearly, are wary of funding new road projects. Lenders are asking developers to show upfront project equity before loan sanction or disbursement. This has delayed financial closure (FC) of HAM projects leading to delays. And, in view of delayed FC, NHAI has slowed down HAM bidding and is focussing on EPC bids.
Devayan Dey, Director-Capital Projects and Infrastructure, PWC, views the reasons for financing challenges as fairly clichéd in terms of poor liquidity, poor capacity or credit worthiness of players, hitches around termination clauses, etc. What’s more important, in his opinion, is to understand what led to such a situation. “These reasons are just intermediary outcomes and not the cause,” he explains. “The root cause can be traced back to procurement norms, especially the qualification criteria not having been reformed for over a decade and being easy to bypass. While land acquisition and clearance issues do persist, the issues are amplified when aspiration versus capacity mismatch remains unchecked by procurement filters. Lack of capacity quickly transforms into delivery issues and lenders started losing confidence.” Lenders are not averse to lending unless the balance sheet and capacity of the borrower do not provide enough confidence. However, it is definitely taking more time.
Looking at projects awarded in the past two years, Rajeshwar Burla, Assistant Vice President & Associate Head-Corporate Ratings, ICRA, says, “HAM and EPC together accounted for over 95 per cent of total awards with EPC accounting for around 50 per cent followed by HAM at around 45 per cent.” He adds that a majority of the Bharatmala programme is proposed to be executed through the EPC route. So, the current award mix is better in terms of private-sector participation compared to the proposed funding plan.
“As such, from NHAI’s side, currently there are no funding challenges for HAM projects,” Burla confirms. “But as far as funding challenges for developers (concessionaires for BOT-HAM projects) are concerned, he says, “Overall, there has been improvement in acceptance levels for national highway-HAM projects from lenders. The time taken to achieve FC has reduced considerably – by more than 50 per cent from 430 days in FY2016 to 194 days in FY2018. However, FC-related challenges resurfaced given that many PSU banks are under prompt corrective action.” He adds that, increasingly, for new developers taking high exposure to HAM projects, achieving closure could be even more challenging in the current situation. Given the low equity requirement for HAM, lenders are concerned about the developer’s commitment till the end of the concession period, especially given that some developers have limited experience in the development space – many tier-II developers have won HAM projects.