The last two decades witnessed highway infrastructure being developed on a massive scale in the country. Now the government has unveiled another huge new highway development programme (covering 83,000 km) under the Bharatmala Pariyojana, which will see a paradigm shift in highway development with focus on improving the efficiency of the national corridor and a long-term view on the highways network.
Bharatmala Pariyojana is expected to bring a paradigm shift in the development of highway infrastructure in the country with focus on improving the efficiency of the national corridor, faster pace of execution and using innovative models like hybrid annuity model (HAM), and toll-operate-transfer (TOT) which will reduce the government's funding requirement.
Bharatmala Pariyojana along with other highway development schemes is estimated to cost Rs 6,920 billion. The funding for the programme is more certain as about 80 per cent of it will be from the government's contribution, 50 per cent from budgetary allocations (GBS, CRF, toll collections) and 30 per cent from market borrowings.
The estimated share of private sector investment for the programme is Rs 1,060 billion, while the expected funding through the monetisation of assets by the TOT route is estimated at Rs 340 billion. These two put together will form about 20 per cent of the total estimated fund requirement of Rs 6,920 billion for Bharatmala Pariyojana Phase-1 and other highway development schemes.
The programme targets completion of 83,677 km of highways by 2022 which is ambitious, given the past execution pace. Going by past experience, land acquisition and approvals can pose challenges. Similarly, while dependence on private sector participation is not high for the programme, scaling-up the pace of execution would mean that the contractors significantly ramp up their capacity to undertake projects. As the projects are likely to be taken up on engineering, procurement and construction (EPC) mode, contractors will not need sizeable long-term funding.
However, while scaling up rapidly, many players can face constraints in arranging for non-fund based limits. Further, the construction sector will have to raise its resource capacity, including manpower, raw material and equipment for executing such a large-sized programme within the time frame.
Shubham Jain, Vice President and Sector Head - Corporate Ratings, ICRA said, 'The Bharatmala Pariyojana aims to bridge critical infrastructure gaps through corridor-based development. Therefore, if it is implemented as per the plan, it has the potential to change the entire landscape.'
To this, Satish Parakh, MD & CEO, Ashoka Buildcon said, 'Bharatmala has a realistic vision of improving the efficiency of the National Corridor (Golden Quadrilateral and North South-East West Corridor) by decongesting choke points through lane expansion, construction of ring roads, bypasses/elevated corridors and logistics parks.' He added, 'We feel that we have a very good opportunity in nation building in the coming five years, and would like to grab the most of it.'
For IRB Infrastructure Developers, the programme brings a good amount of orders, thus helping them strengthen their profile in India. Sudhir Hoshing, Joint Managing Director revealed, 'We already have a construction order book backlog of Rs 155 billion. We keep on bidding at our comfortable numbers and take whatever comes our way. We are in no hurry as such.'
Surge in project awards According to data from the National Highways Authority of India (NHAI), in fiscal 2018, awarding of highway construction projects rocketed by 70 per cent to an all-time annual high of Rs 1,200 billion, spanning 7,400 km. The difference is steep compared to 4,300 km projects worth Rs 590 billion awarded in fiscal 2017. CRISIL Research expects both the awarding and execution of projects to be faster in fiscals 2019 and 2020, if the NHAI manages to not only source funds on time, but also procure them above the budgetary allocation.
Of the total length awarded by the NHAI in fiscal 2018, 51 per cent was through EPC, 46 per cent through HAM and the balance through build-operate-transfer (BOT)-toll mode. In fiscal 2017, the proportions were 34 per cent EPC, 56 per cent HAM and 10 per cent BOT-toll. Competition remains high forthe EPC mode, and from low to moderate for HAM.
Says Prasad Koparkar, Senior Director, CRISIL Research, 'A majority of the EPC projects were bid out at par or well below the NHAI's request for proposal (RFP) cost - in some cases, even 20û25 per cent lower. On the other hand, under HAM, most of the projects were won above NHAI's RFP cost, some even 45 to 50 per cent higher.'
Interestingly, the contract awarding momentum was muted in the first three quarters of fiscal 2018 at 1,700 km, and it mainly comprised EPC projects. Most of the HAM projects were bid out between January and March.
The momentum seen in the fourth quarter is expected to continue in the first quarter of fiscal 2019 with many projects already being tendered and waiting to be awarded. Fewer contractors won most of the HAM projects, which could stretch their management capacity and lead to the overall share of such projects being awarded declining in fiscal 2019.
Execution in fiscal 2018 up to January was 1,993 km, compared with 2,625 km for the whole of fiscal 2017.
Says Binaifer Jehani, Director, CRISIL Research, 'To generate capital this year, we expect more bundles of existing toll roads to be put on the block under the TOT model by the NHAI, after the big success of the first nine bundles auctioned in February-end, which generated Rs 97 billion.'
Fiscal 2018 witnessed some new players entering the HAM space. Some of them canfind it difficult to tie up funds as the banks are expected to be increasingly cautious on lending, given the ongoing stressed asset issues in banking.
At 17 per cent of the total length awarded, Rajasthan saw the highest share of highway contracts, followed by Maharashtra, Odisha and Uttar Pradesh with 10 per cent each.
High refinancing risk in TOT
India Ratings and Research (Ind-Ra) opines that the first bundle of TOT projects poses funding or refinancing risk, as India's funding structure for long-term projects is typically 10 to 15 years. Also, a long initial concession period of 30 years will translate to a high initial estimated concession value (IECV), resulting in a high interest component for the initial years' cash flows. Ind-Ra observes that even if the actual toll revenues are in line, NHAI can face potential stress in cash flows during initial years because the cost of debt is base rate plus 3 per cent.
'This means that these assets require an upfront overlay to the tune of Rs 8.55 billion towards engineering and safety improvements, apart from an upfront lumpsum bid amount of Rs 62.58 billion and first major maintenance in FY24,' says Ratnam Raju Nakka, Analyst, India Ratings.
The stress in cash flows would aggravate on an increase in interest rates. Debt service coverage ratios (DSCR) for the initial six years of operations will be thin, even in case of a negligible principal payment. Hence, some sort of structuring is required to improve the minimum DSCR and provide comfort to the lenders. The agency believes a reduction in the concession period by five to seven years for subsequent bundles would lower IECV and thus help the concessionaire to mitigate funding or refinancing risk to a certain extent.
Bidding to be competitive
Experts suggest that private equity firms and funds would be the front runners for TOT bidding, as these funds are looking for investments in operating assets with a longer horizon. Under the TOT model, NHAI has amended the bidding eligibility, making it more encouraging for private equity and venture capital funds. Bidders with assets under management above five times that of IECV or bidders with net worth above 40 per cent of IECV are eligible for bidding. This is a paradigm shift from the traditional eligibility criteria, in which infrastructure developers are eligible to bid contingent upon meeting certain minimum net worth and technical parameters. Domestic infrastructure players may participate through a consortium or tie-ups with financial institutions as O&M operators.
EPC and TOT domination
Private participation has been meagre in the road construction sector, in lieu of delays in acquiring land and obtaining statutory approvals and clearances, aggressive bidding and difficulties in forecasting traffic volumes. Bharatmala is focused on expediting the construction of shortest routes between origin and destination and removing bottlenecks by providing greater connectivity. The government plans to construct ambitious 45 km/day of roads under Bharatmala Pariyojana. To achieve the stated targets, EPC's share of projects will be higher than BOT and HAM, given that it releases the contractor from acquisition and clearance burden.
- Rahul kamat