- The share of HAM projects has decreased from 36.72% of the Rs. 198,164 crore projects awarded during FY18, to a mere 1.5% of the Rs. 48,288 crore projects awarded up to January 2020 during FY20.
- In terms of cost, 93% of the road projects awarded during FY20 has been awarded under the EPC mode.
India has a widely connected road network spanning over a total of 5.8 million kms (comprising National Highways, Expressways, State Highways, Major District Roads, Other District Roads, and Village Roads). This is the second-largest road network in the world.
Over 64.5% of all goods in the country are transported through roads, while 90% of the total passenger traffic commute through the road network.
The length of national highways construction has increased at a rate of 14% during Financial Year 2016-20. The pace of construction per day has increased from 16.6km/day during FY16 to 28km/day during FY20.
On the other hand, the year-on-year pace has declined for the first time in the last 5 years by 6.2% during FY20 as compared with the 29.8km/day pace achieved during FY19. The steep drop in toll collections and a slowdown in the pace of asset monetisation from Toll-Operate-Transfer (TOT) model, has added to the funding challenges for the NHAI amid tight liquidity conditions. This is likely to put the government body’s road work at risk, at least in the near term. All this comes after a forgettable FY 2020 where toll revenue growth was negligible.
The economic slowdown, revised axle-norms, and the lockdown in March have affected the traffic movement. Rating agency ICRA has estimated a 10-13% decline in toll collections across projects in the fiscal year 2021.
Modes of Awarding Projects
The recent shift in awarding orders from the National Highway Authority of India has shown an increasing preference for pure Engineering Procurement and Construction (EPC) orders instead of Hybrid Annuity Model (HAM) projects.
EPC projects are those where the government bears the total project cost and private contractors do the work while HAM projects are those wherein the government pays 40% of the total project cost upfront and the developer initially pays the rest 60% which is later reimbursed by the government over the years. HAM is a hybrid version of the EPC and build-operate-transfer (BOT) model.
There’s another kind of contract, named Item rate contract where detailed design, specifications & estimates are provided by the employer and contractor is paid for the quantities executed as per item wise rates quoted in the Bid. Cost and risk of any variation in quantity is borne by the employer.
“The key reason for this shift is the challenging fundraising scenario and market risk associated with BOT projects leading to reduced bidding appetite from developers,” said CARE Ratings in a report.
When Bharatmala was approved during FY18, the standard operating procedure was to award 60% of the planned roads under HAM, 30% as EPC contracts, and 10% as BOT projects. But NHAI now wants to award projects depending on market conditions and focus more on EPC mode of project construction, the report added.
The share of HAM projects has decreased from 36.72% of the Rs. 198,164 crore projects awarded during FY18, to a mere 1.5% of the Rs. 48,288 crore projects awarded up to January 2020 during FY20. This indicates that in terms of cost, 93% of the road projects awarded during FY20 has been awarded under the EPC mode.
However, the highway sector has seen an interest in pure public-private-partnership projects. Five firms have shown interest in two national highway stretches totaling 132-km under the traditional build-operate-transfer(toll) model.
Roadblocks for the Sector
There is a large gap between the funding required versus the funding which the sector has received. Road projects are increasingly facing financial closure issues due to reluctance of banks to lend, a high share of Non-Performing Assets(NPAs), asset-liability mismatch, and banks reaching infrastructure lending caps.
The sector lacks budgetary funding from the government. NHAI was authorised to raise Rs 75,000 in the form of Internal and Extra Budgetary Resources (IEBR) — resources raised by the PSUs through profits, loans, and equity by during FY20, but the ministry has only been able to raise about 64.9% of the projected IEBR amount up to January 2020. The amount authorised to be raised during FY21 has also been reduced.
The commercial viability of certain projects has also not been able to stimulate interest from private players. The HAM method of awarding road projects was supposed to revive private sector investment in the industry but it has turned out to be a mixed bag for the roads sector.
Delay in the implementation of contractual reforms under HAM and moderation in credit profile are the prominent reasons for the delay in financial closure for HAM projects. Weak traffic and slow pace of execution have also resulted in the delay of repayment of debt to banks. Given this experience, banks are only selectively funding road projects.
“Lack of labour is the biggest issue that every developer, no matter how big or small, is facing today,” pointed Sethia to The Blue Circle.
“In the current situation, monetisation has taken a set back and will take substantial time to recover,” said Sethia.
The Government has failed to attract the necessary investor interest to meet the excess capital requirements to fund new projects.
Currently, the only avenue used by the NHAI is offering stretches of roads under the TOT model which is also getting a tepid response, and bids received are not meeting the Net Asset Value as well.
Of the four bundles to be awarded, only the first was a resounding success, which fetched the government about Rs 9,000 crore. The second bundle was canceled after it got a tepid response from investors. The third (which is awarded) and fourth that were expected to garner about Rs 10,000 crore by the end of fiscal 2020, are yet to be completed.
Now due to the expected fall in traffic due to the lockdown and sealing of state borders, the successful rollout of TOT seems challenging. Further, the implementation of the Force Majeure clause for compensating developers for the toll suspension period of the Covid19 outbreak is less effective. Usually, projects which attract high-density traffic are monetized quicker as it supplicates the needed investor interest.
While the creation and operation of quality road infrastructure is a major requirement and imperative to economic growth, the roads and highway construction is to fall by 24-26%, according to CARE estimates. The pace of construction is to be around 20-21km/ per day during FY21 from 28 km/per day during FY20.
The sector is already impacted by the lower contracts in FY18 and FY19 due to reduced bidding appetite from developers and now with the COVID-19 pandemic prevalent in the economy, it has further increased execution woes. The reverse migration of workers and the onset of the monsoon season will also have a negative bearing on construction activities and slow down its execution.
Though NHAI’s initiative to declare appointed date only after handover of 80% land and higher is helping in steady increase in pace of construction, district officials who carry out the land acquisition activities are busy on COVID-19 duty and financial states are facing a shortage of funds which too will add to the slow pace of highway construction for state projects.
CARE Ratings said that it expects the upcoming projects largely through the EPC mode which is fully funded by the government. Though with the pandemic curve rising and healthcare taking precedence in budgetary spends, the allocation to infrastructure may be compromised.
Private players are facing arbitration issues, HAM projects also faced execution issues due to delay in implementation of contractual reforms of de-scoping and lengthy process of issuing an extension of time. The private investment brought in through the BOT toll model has remained subdued as well over the years.
Freight dominated stretches are expected to bounce back early as reflected from the initial trend of achieving 60-70% of toll collection for some of these stretches post resumptions of toll collection. Toll collection is expected to fully recover December 2020 onwards as there could be an increase in traffic due to interstate movement as well.
Sethia said that a revival of the economy will take place when infrastructure is at the forefront of policy making. As the sector is a big employment generator, it has the capacity to help kickstart economic growth.
“I am optimistic that the infrastructure sector will do well as it has performed above average even in such a drastic time,” concluded Sethia.
(Edited by Anu Choudary)
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