Ratings agency ICRA has maintained a cautious stance on the road sector, even as the government has decided to invest Rs 102 lakh crore from fiscal 2020-2025 in modernising infrastructure.

This stance taken by ICRA is due to a combination of factors from increased borrowings by NHAI to high land acquisition costs.

NHAI is the regulatory body for roads and in many cases funds projects upfront. Further, with around 90-92 per cent of the awards over last few years through engineering procurement and construction (EPC), wherein NHAI has to fund 100 per cent upfront and Hybrid-Annuity Model (HAM), wherein NHAI has to fund 40 per cent upfront and remaining 60 per cent over a period of 15 years, continues to put a high strain on NHAI’s finances.

NHAI borrowings

The total debt for NHAI has increased by more than 2.4 times to Rs 1.79 lakh crore as on March 31, 2019 from Rs 75,385 crore as on March 31, 2017. NHAI’s borrowings are expected to get doubled by FY2022 to fund the on-going Bharatmala Pariyojana programme. Further, NHAI’s borrowings are expected to get doubled by FY2022, stated ICRA.

After witnessing four consecutive years of healthy awarding activity; NHAI reported lowest ever project awards in FY2019 at 2,222 km. Further, the awards during five months FY2020 remained low at 515 km. Land acquisition challenges and funding issues remained major hindrance for project awards. Even for the projects that were awarded through HAM, while developers were ready with the financial closure; NHAI is facing challenges in providing requisite right of way and consequently appointed date is delayed.

The other issue is with regard to land acquisition costs which has exponentially increased over last few years to around Rs. 3.40 crore per hectare currently as against Rs. 0.90 crore per hectare in FY2014. Land cost alone accounts for more than 30 per cent of the total expenses of NHAI.

Funding avenues

NHAI’s focus on asset monetisation and tapping alternate funding avenues such as toll-operate-transfer (TOT) and infrastructure investment trusts (InvITs) given the huge funding requirement for the on-going Bharatmala Pariyojana programme are positives. ICRA has pointed out that there is a need to speed up the TOT awards and other fund-raising initiatives (such as InvITs) to meet the large funding requirements of the ambitious programme. In this context, the successful completion of third TOT bundle bidding process and the recent CCEA decision authorising NHAI to set up InvIT is a positive, it said.

Finally due to concerns on rising debt levels of NHAI, as a result of increased risk averseness of road developers, the regulator plans to revert to earlier BOT (Toll) model. “Even today, many developers’ balance sheets cannot support huge equity investments towards BOT projects. Further, the transportation sector is undergoing transformational change with alternate modes viz. dedicated freight corridor and inland waterways which would result in a modal shift from road to these modes over the medium to long term. In addition, the road network itself is undergoing significant changes with some of the economic corridors under Bharatmala competing with few existing stretches,” noted ICRA.

Overall, these factors make traffic forecasting extremely challenging. Therefore, BOT (Toll) model in its current form may not have many takers. Achieving financial closure also would be a challenge given these uncertainties. Therefore, 2020 is likely to be a year of muted awards due to change in award mix, resultant procedural delays, weak private sector interest. ICRA expects the awards to remain in the range of 3,700-4,000 km in 2020.

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