HAM-strung?

The National Highways Authority of India (NHAI) is the nodal agency for development of highways in India, and currently manages 2 per cent of the road network transporting 40 per cent of the traffic. The authority, under the leadership of Union Minister Nitin Gadkari, has unveiled the Bharatmala Pariyojna with a capex budget of Rs.5.4 trillion. NHAI has awarded majority of the projects under the engineering, procurement, construction (EPC) or hybrid annuity model (HAM) since 2014. This has increased the financial burden on NHAI. According to ICRA, the table below shows the rating of the past three years’ debt:  

It is estimated in the report that in FY2020, NHAI’s expenditure is expected to be funded through Rs.160.91 billion of cess fund, Rs.106 billion of plough back from consolidated fund of India, 

Rs.100 billion of asset monetisation through the TOT mode, and Rs.750 billion though market borrowings. Thus, overall borrowing at the end of FY2020 will be about Rs.2,410 billion. As per the same report, the average cost of borrowing in recent years is around 8.11- 8.55 per cent. However, for tax-free bonds, the interest rate is 5.75 per cent; for masala bonds, the interest rate is 7.11 per cent. 

Owing to the poor response to BOT projects and impact on financials of developers, NHAI did not receive a favourable response on BOT projects under the tolling mode. Hence, the authority shifted to EPC, where 100 per cent project cost is funded by NHAI. Alternatively, it has come up with a new hybrid funding model, where project developers invest 60 per cent of the project cost and NHAI funds 40 per cent of the project cost as grant. The authority pays the RBI a bank rate of linked interest rate on 60 per cent of the project cost every six months. The interest is calculated as RBI bank rate plus a 3 per cent spread. For example, if the bank rate is 6 per cent, the developer will get a 9 per cent interest rate from NHAI. 

Thus, the developer was protected from the interest rate movement. NHAI has assumed that banks will follow the RBI rate and, accordingly, reset their interest rates. In case interest rates go down, the developers’ borrowing cost will also come down and vice versa. This was a good model in theory.

Under this model, the developer is protected from toll collection shortfall. Hence, it was considered a safer model from the developer’s perspective. 

The table below gives the movement of RBI repo rates and SBI MCLR and HDFC MCLR rates: 

It is seen from the table that the RBI has reduced the repo rate from 6.50 per cent to 4.40 per cent in the past two years, amounting to a cut of 2.10 per cent. However, the SBI MCLR rate has reduced from 8.55 per cent to 7.40 per cent with reduction of only 1.05 per cent, and HDFC’s MCLR has reduced from 8.75 per cent to 8.15 per cent with reduction of 0.60 per cent during this period. Hence, banks have not passed on the benefit of repo rate reduction to their customers.  

HAM developers are facing a financial crunch at this moment. Most banks have put EPC companies under the negative list. Most banks are reluctant to undertake financial closure. About 35 projects have faced delays in financial closure owing to the cautious approach of banks. Most banks are laying down stringent conditions, such as upfront equity investment and disbursement after 30 per cent of physical progress. Hence, most HAM developers are facing financial difficulties in arranging funding for projects. 

Further, most banks are charging interest between 9.50 per cent and 11 per cent during construction and 9 per cent and 10.5 per cent during the operations period. However, now NHAI will pay them an interest at 7.40 per cent (4.40 + 3 per cent) only. Hence, there will be a deficit of 1.60 per cent to 3.10 per cent for most developers and this deficit needs to be funded by them. According to the terms of the concession agreement, this will not fall under the change of law, as NHAI interest payment is linked to the bank rate. The additional funding requirement will put additional pressure on the balance sheets of developers. 

In the recent past, various HAM acquisition deals have been announced, where Cube Highways agreed to buy HAM assets from KNR Constructions and Dilip Buildcon. These deals will also require renegotiation in view of the decrease on the RBI repo rate.

Owing to the reduction in interest rates, NHAI will be the biggest beneficiary. Its borrowing cost under HAM will only be 7.40 per cent. 

The average borrowing cost of NHAI is around 8.11 per cent to 8.55 per cent. Thus, NHAI will save around 0.60 per cent to 1.15 per cent by borrowing from developers under HAM. This will be a big windfall gain for NHAI. 

Vijay Agrawal, Executive Director, Equirus Capital, heads the firm’s real-estate practice. He is working with clients in real estate, infrastructure, e-commerce, pharma, retail, manufacturing and other sectors.

To share your views, write in at feedback@ConstructionWorld.in