In a conversation with Liza V, Rajeshwar Burla, Vice President & Associate Head, Corporate Ratings, ICRA Ltd, explains why the target for road capacity addition may not be met.els.
Major announcements under Bharatmala happened in June, but in the following months, we saw an oscillation in the economy. Considering the current scenario, what is your take on the implementation of the projects?
The PMO has raised concerns about the rising debt levels in NHAI. The awarded large projects were under the EPC and BOT HAM models. The problem with these two models is that the funding from the government or the dependence on the government is substantially higher. The BOT toll was made the preferred mode of awarding projects, but there are certain challenges. The overall equity commitments from private developers will be considerably higher compared to the HAM model. In HAM, 40 per cent is funded by the government, whereas in the BOT toll the entire equity contribution comes from the developers. Given the current situation of many of the developers and the condition of their balance sheets, it will not be easy for them to infuse such high equity. Hence, projects awarded under the BOT toll in its current shape may not be high because of this constraint.
Unless there is some clarity on the revised BOT toll model the project awarding activity will definitely take a hit this year. In terms of execution, it shouldn't be a problem. Execution-wise, I think the target is around 11,000 km which will be roughly 30-odd km per day. They have a strong pipeline because in the last two to three years the awarding activity has been quite good, and for many of these projects, the land has been made available. Largely, they should be in a position to meet these targets for the current financial year.
So, there could be a dip in the target of road capacity addition?
That's right. There are two bad years if this year remains muted. Fiscal 2019 was anyway muted because of the general elections and land acquisition. Now if another year of awarding activity remains muted then it means two years of back-to-back slowdown in terms of awarding projects. This will have an impact and will result in some decline in terms of execution. There will not be enough backlog which will translate into capacity addition.
Land acquisition and funding for road projects are still matters of concern for most developers. Do you see this continuing because the government has several times talked about a stimulus, more liquidity infusion, etc.? How much do you think this will help the developers?
From the developers' point of view, at least for the projects that were handed through the BOT HAM route, 40 per cent of the funding comes from the government upfront, hence there were not many challenges. Also, lenders have come to terms with the BOT HAM model, and there was a good amount of acceptance of it in the market. As far as financial closure is concerned, they are doing okay in the market. The problem lies in the land acquisition part. If you look at the overall awarding that has happened through the BOT HAM route, 105-110 projects were handed out through this model, of which around 90-92 per cent have achieved financial closure. Surprisingly, NHAI was not able to announce the appointed dates because it did not have 80 per cent of the right of way available. And unless the start date is announced the lenders won't disburse funds.
If you look at the percentage of projects for which the appointed date has been announced, it will be around 72-75 per cent. The developers are ready, but the NHAI, because of delays in land acquisition, is unable to commence the project. The good thing to be noted is that, unlike in the past, NHAI is adhering to the contractual terms in the construction agreement. Now, at least from the NHAI side, they are very clear that unless they get up to 80 per cent, they will not declare the appointed date. Plus, there is a termination clause in these projects. If NHAI fails to provide the required 80 per cent of the land within a year of the project award date then the developer can ask for the termination of the project.
There is more concentration on the north-eastern region for road development. Could you shed some light on this? And how feasible is it at this point?
The Northeast has got a lot of thrust from the government to focus on infrastructure projects. A separate entity is to be set up to address the issue as NHAI is not looking at it. So, there is National Highways and Infrastructure Development Corp. under the Ministry of Road Transport & Highways. NHIDCL is the nodal agency that takes care of the requirements of the Northeast, and a good amount of budgetary allocation was made to NHIDCL to take up these projects. These projects will be only till the ETC roads. It will be very challenging to execute as these are very complex topographies, hilly terrains, and in terms of execution, there could be substantial delays due to a variety of reasons. One has to get adequate resources, manpower and machinery there, and the weather conditions will be very different from what is prevalent in other parts of the country, excluding Jammu & Kashmir. Being a challenging terrain with extreme weather conditions, you will see a limited number of players participating. However, in terms of margins, it will be relatively lucrative, and the awards will be till ETC roads.