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Traffic underperformance is key risk

Traffic underperformance is key risk

As NHAI attracts yet another round of premium bids, a report says that toll road projects in first-year traffic was below projections by up to 45 per cent.

The budget has allowed Rs 100 billion tax-free NHAI bonds in FY 13. The money raised from will be used to partly finance various National Highway projects under different government schemes, and some of it will also be used for Viability Gap Funding (VGF) for build-operate-transfer (BOT) road contracts. Raising money from the bond market would also allow NHAI to expedite the land acquisition process.

More goodies came the National Highways Authority of India’s (NHAI) way last month in the form of premium bids. Out of eight bids opened in March, seven have attracted premium, and the eighth has a much lower VGF than NHAI expected. The overall saving on the net profit value from these bids is Rs 6,451 crore.

Larsen and Toubro (L&T) bagged the two bids of NH 6, thus completing the full stretch from Gujarat bor­der to Amravati. This road connects Hazira port –Surat to Paradip and onwards to Kolkata. KMC consor­tium would be doing the Aurangabad-Barwa Adda project in Bihar-Jharkhand, involving part six-laning of the Delhi-Kolkata Golden Quadrilateral.

Other success­ful bidders include Sadbhav, Unity Infra, Transtroy and IVRCL.

NHAI has awarded 6,500 km already—28 per cent higher than the highest so far, and has called for bids for another 1,500 km. NHAI has set a target of 7,300 km of highways to be awarded in 2012-13 (out of the roads ministry’s overall target of 8,800 km under NHDP)—many under BOT, an example of whose success has been premium bids. However, experts hope that an immediate anxiety to bag projects is not triggering bidders to seal a long-term premium deal over-optimistically.

This is because traffic performance is rarely in line with, or above, management expectations. Indeed, as a recent Fitch Ratings report points out, traffic underperfor­mance is a key risk for many Indian operational toll roads. A majority of Fitch-rated toll road projects in India have seen actual first-year traffic underperform proje­ctions, and in some cases by up to 45 per cent.
The accuracy of traffic estimates, as demonstrated by actual first-year revenue, is key to a project’s ability to meet debt service obligations. However, many traffic studies are based on point-in-time traffic counts and standardised growth estimations, often failing to ade­quately measure local economic drivers, and their dyna­mic and interactive impact. Traffic growth proje­ctions based on these studies also do not account for the impact of economic cycles on traffic growth rates.

The report says the widespread overestimation of traffic could also in part result from sponsor optimism, motivated by lucra­tive construction contracts in competitive bidding. In some rare cases, overestimation could result from unanti­ci­pated exogenous events such as a change in regulation or the unexpected delay or cancellation of a planned spe­cial economic zone. The unsatisfactory ramp-up experie­nce of several Fitch-rated toll road projects in India, and the consequent difficulties in servicing debt through oper­­a­tional cash flows, has resulted in several downgrades.

In recent years, high inflation in India has allowed toll roads to partially mitigate the negative impact of traffic underperformance on overall revenue through inflation-linked toll rate increases, specified in most concession agreements.

Toll roads that became operational during the 2008-09 economic slowdown were affected by a variety of factors. Significant traffic underperformance in the first operational year was compounded by slower-than proje­cted traffic ramp-up. These projects also endured a rising inte­rest rate regime. As a result, the revenue under-perfor­­mance was reinforced in each successive opera­tional year), and traffic and revenue has not caught up with original estimates.

Most toll road projects in India are highly leveraged, with low projected debt service coverage ratios (DSCR) and weak structural features such as low debt service reserves and compressed debt repayment. Combined, these factors leave DSCRs highly susceptible to any deterioration in traffic, particularly in conjunction with stresses in other variables, such as interest rates. However, Fitch notes that even under severely stressed situations, most projects typically retain the long-term economic capacity to fully repay debt.

–With inputs from Shyamali Rajivan, Associate Director, Fitch Ratings. See Stats on pg 66 for NHAI bid details.


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