Opportunities galore, but targets ambitious

With an estimated average spend of upwards of Rs 1 trillion per annum (excluding land cost), the order book additions will remain healthy for both, large and mid-sized road contractors over the next four to five years.
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<p> The Cabinet approved the Bharatmala Pariyojana Phase-I along with other programmes in October 2017 which involves around 83,000 km (including Bharatmala Pariyojana Phase-I of 24,800 km) of national highways’ development by FY22. The Bharatmala Pariyojana aims to bridge critical infrastructure gaps through corridor-based development which is a more scientific approach, desirable in the long-term, as it takes a holistic view on the overall network. Therefore, the Bharatmala programme has the potential to change the entire landscape, if implemented as per plan.</p>
<p>The National Highway Development Programme (NHDP), the largest highways project ever undertaken in the country till date, had achieved a progress of 26,255 km in 17 years. The cumulative awards and execution for the last nine years, by the Ministry of Road Transport and Highways (MoRTH) stood at 79,032 km and 53,136 km, respectively. Given the past track record, completing 83,000 km by FY22 looks extremely ambitious.</p>
<p>In order to catch up with the ambitious target for the new highway development programme which is 83,677 km by FY22, the award rate has to more than double from what it is currently.</p>
<p> <span style="font-weight: bold;">Bharatmala hinges on the timely land acquisition </span><br />
The biggest hurdle is unquestionably the land acquisition issue which can hinder road development. Fragmented land holdings, lack of clear land titles, dependence on local authorities, inadequate land acquisition plan at the time of preparing detailed project reports and lack of methodology for compensation are the major difficulties faced during land acquisition. In about 80 per cent of the delayed road projects, the reason for the delay is attributable to unavailability of the right of way which is the responsibility of the awarding authority. Another major challenge for Bharatmala (unlike NHDP) is compliance to the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR), which led to an increase in compensation by four times the market value in rural areas and twice the market value in urban areas. This has resulted in a steep increase in acquisition cost to upwards of Rs 25 million per hectare currently (as against Rs 9 million per hectare in FY2014). </p>
<p>Land acquisition cost as a percentage of total project cost for the NHAI projects was at 9 per cent in 2009, increased to 16 per cent in 2012 and for some of the recent expressway projects, the land acquisition cost is estimated to be in the range of 37-55 per cent of the total project cost. Securing huge land parcels for the new highway programme by complying with the RFCTLARR Act in its current form is going to be a challenge. The government made an unsuccessful attempt to amend the Land Bill in 2015 by easing land acquisition norms for infrastructure projects (including PPP). Therefore, the success of the programme critically hinges on the pace of land acquisition along with other requisite approvals.</p>
<p>It ought to be mentioned that some of these issues do get addressed through digital land acquisition (use of Bhoomiraashi for Bharatmala) and prioritising stretches with detailed project reports and readily available the right of way, including the grand challenge mechanism wherein projects are taken up on a fast-track basis if sufficient and timely land is made available by the state governments. Moreover unlike in the past, wherein projects were awarded without acquiring requisite land, the Bharatmala awarding process is expected to be more transparent with tighter pre-requisites; 80 per cent of RoW for BOT projects and 90 per cent for the EPC projects will be made available before awarding.</p>
<p> <span style="font-weight: bold;">Huge opportunities </span><br />
With an estimated average spend of upwards of Rs 1 trillion per annum (excluding land cost), the order book additions will remain healthy for both, large and mid-sized road contractors over the next four to five years. While the cash conversion cycle for road contracts is relatively shorter when compared to other infrastructure sectors, the non-fund based limit requirements are high. The total value of the government-funded projects under the new programme is estimated to be around Rs 4.70 trillion (excluding land cost) over a four-year period implying peak bank guarantee requirement of around Rs 350 billion (average execution period of two years). Therefore, providing necessary collateral security for securing additional non-fund based limits could be a challenge, especially for mid-sized contractors.</p>
<p> <span style="font-weight: bold;">New economic corridors under Bharatmala</span><br />
The Bharatmala network designed on the shortest possible route connecting the origin and destination, though a well thought through and definitely a step in the right direction, is bound to impact the existing network by directly competing with a few stretches including some of the existing toll road projects. An estimated 24 BOT (Toll) and 1 OMT road projects involving Rs 194 billion of debt would be at risk as a result of the proposed 44 economic corridors under Bharatmala Pariyojana.</p>
<p>The traffic diversion risk for about 72 per cent of the projects is low, while 16 per cent of the projects have a moderate risk and the remaining 12 per cent of the projects have a high risk of leakage in traffic with the availability of an alternate route.</p>
<p>Although Article 30 of the Concession Agreement extends protection to the BOT toll road projects by restricting construction of additional toll-way, this clause is not applicable if the length of such additional toll road exceeds the length of the existing route comprising the project highway by 20 per cent. The proposed economic corridors are either longer by more than 20 per cent or traverses a new route completely and hence, does not fit into the description of the additional toll-ways as defined in the concession agreement. Therefore, traffic loss or diversion arising out of these would not get compensated under the concession agreement. As it cannot be termed as Authority Event of Default, in most cases this may end up in dispute with authority, in turn, invoking Concessionaire Event of Default (which is the case with most of the terminated projects till now). The termination payment in case of concessionaire event of default is equivalent to 90 per cent of debt due (here, debt due is calculated as if the capital cost was restricted to the total project cost as per NHAI). As per ICRA research, in around 40 per cent of the total BOT projects, the debt sanctioned is higher than the total project cost as per NHAI, resulting in the shortfall in termination payments when compared to the actual debt due.</p>
<p>To arrive at the debt at risk, the debt outstanding for each of these SPVs, repayment tenure, concession end date, credit profile of the SPV and its sponsor credit risk profile are considered.</p>
<p> Authored by Rajeshwar Burla, Assistant Vice President-Corporate Ratings, ICRA.</p>