Roads and highways minister Nitin Gadkari has earned himself a reputation for putting new life into the highways sector. But could this lead to problems a few years down the line? Could there be a repeat of what happened during the United Progressive Alliance (UPA) years when aggressive bidding put the balance sheets of many infrastructure companies at risk?
It could, according to a Crisil report titled New Roads, Old Pain. The report warns that aggressive bidding for roads projects could backfire: a quarter of the projects awarded on the hybrid annuity model could face debt servicing challenges in the future.
It cites the example of past projects which saw aggressive bidding between 2009-10 and 2011-12. As much as 36 percent of these under-construction build-operate-transfer (BOT) projects are, the report says, at a very high or high risk of not being completed. These projects span 3,200 km, have a sanctioned debt of Rs 29,000 crore and are backed by financially weak sponsors. The cost overrun (which could mount with further delays) is estimated at around Rs 11,000 crore.
The study also finds 15 under-construction projects which had achieved the provisional commercial operations date (PCOD) are still unviable because of cost overruns and weak sponsors. These projects cover 1,400 km and need 60 percent revenue growth to meet debt service obligations.
The hybrid annuity model has brought back private interest in the roads sector. Till August, 27 projects totalling 1,500 km were awarded through the hybrid annuity route. The report expects around half of the 11,000 km of projects to be awarded in this fiscal to be done through the hybrid annuity mode. Competition for these projects is also increasing, with the average number of bidders for projects increasing from three to 10.
The report points out that bids under the hybrid annuity model are getting aggressive, compared with both the base project cost and the normative operations and maintenance costs of the National Highways Authority of India (NHAI). It is particularly concerned about several mid-sized and small developers getting into the game.
The risks the report points to are: the ability of these firms to get the required equity money in a timely manner and to provide financial support in case of time and cost overruns and cash flow mismatches.
Despite these problems, the report finds the roads sector has picked up pace, thanks to various reforms that the government has initiated.
Land acquisition troubles appear to be easing. Crisil studies 40 projects tendered out by NHAI in 2015 and 2016. It found that 92-95 percent of the land for these projects was at a very advanced stage and compensation payment had been determined in 83-88 percent of the cases.
The report also confirms that the pace of roads construction has picked up. It may not be as high as Gadkari’s claims to this writer about 25 km a day, but Crisil finds that the pace has increased from 4.3 km a day in 2014-15 to 6 km a day in the current fiscal. Crisil looked at projects awarded in 2012-13, 2013-14 and 2014-15 at eight, 12, 18 and 30 months after being awarded.
Projects awarded in 2014-15 had reported 25 percent execution after 12 months of being awarded. In contrast, projects awarded in 2012-13 and 2013-14 had reported only 3 percent and 18 percent execution respectively after 12 months.
And though it is concerned about high-risk projects, the report points out that the number has reduced. Projects with high construction risk reduced by around 500 km in 2015-16.
The report also finds the credit profile of BOT projects has improved. It studied 104 operational projects with total outstanding debt of Rs 46,950 crore and found that 35 percent (28 projects with outstanding debt of Rs 19,650 crore) at risk, compared to 45 percent last year. It attributes the credit risk to the lack of standalone cash flows to meeting debt obligations.
So, there’s both good news and bad news in the roads sector. Gadkari has a huge challenge facing him. According to this report, 78 percent of national highways are either one-lane or two-lane ones.
Further speeding up the pace of construction and removing all procedural roadblocks is something the government needs to focus on and not waver at all.