NHAI would be considering to increase the mix of BOT (Toll) awards

It is time to devise a new model on the lines of BOT (HAM) to reduce the upfront equity contribution for private developers to an extent.

Rajeshwar Burla, Vice President, Corporate Ratings, ICRA Limited

Could you throw some light on the investment scenario in the road sector?

The total infrastructure investment in India between FY2013-FY2019 stood at Rs. 57 lakh crore. Of this, about 18%, i.e. Rs. 10.3 lakh crore was invested in road infrastructure. Further, the Government of India (GoI) has set a target of increasing the investment in infrastructure to over Rs. 111 lakh crore over the FY2020-FY2025 as per the National Infrastructure Pipeline (NIP). Majority of the targeted Rs. 111 lakh crore infrastructure investments are planned towards transportation infra. The investment in road sector over FY2020-FY2025 is estimated at Rs. 20.3 lakh crore (18% of total outlay for NIP) which signifies the importance of the road sector. Road sector has a multiplier effect on the economy and provides large employment opportunities. It is estimated that a total number of 4,076 man-days are required for construction of one km of highway.

What is the impact of the measures taken by the government to reboot the system?

The measures taken by government of India are likely to provide liquidity relief for construction contractors. As on December 31, 2019, there are 181 projects totaling 13,670 km with a total project cost of Rs. 2,20,294 crore awarded under public private partnership route (build-operate-transfer (BOT) projects) which are under construction and another 1260 projects involving total cost of Rs. 3,65,287 crore in various stages of construction which are awarded through EPC route.

A series of measures were taken by GoI to address the problems faced by construction contractors

1. a) All projects were given extension in construction period for a period of three to six months under force majeure event
2. b) Partial release of bank guarantees (to the extent contracts are complete) is a positive step and can help release some liquidity for contractors which is blocked in the margin money against these bank guarantees.

The Ministry of Road Transportation and Highways (MORTH) has also decided to release the retention money in proportion to the work already executed; with no fresh deductions of retention money for next three to six months. All these measures provide liquidity relief to road contractors. Further, both BOT developers and EPC contractors in road sector are contractually well protected from time and cost overruns arising due to Covid pandemic.

The almost 'dried up cash flow' is said to be a major challenge in the sector, especially the contractors not receiving money from NHAI which has a crippling effect down the stream. What is your take on this and what needs to be done to alleviate these pressure points?

NHAI continues to make timely payments to contractors; intermediate release of money between milestones will ease working capital stress for contractors. The working capital position of many companies working for central government bodies have improved in last few months as they have been able to get payment from clients. As per media reports, NHAI has released about Rs. 25,000 crore dues of contractors in the month of March-2020. Further, for all highway projects executed under EPC and hybrid annuity mode, the payment frequency has been revised to monthly from milestone based earlier which will ease working capital stress for contractors.

But there has been increasing financial burden on NHAI…

True. As a result of compliance to Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR), the land acquisition cost for the NHAI increased at a CAGR of 27% from FY 2007 to FY 2019 from Rs. 0.21 crore per hectare to around Rs. 4 crore per hectare (increased by 19 times).

The Cabinet Committee on Economic Affairs (CCEA) approved the BMP Phase-I along with other programmes on October 24, 2017. A total of around 34,800 kms are being considered in BMP Phase I which also includes 10,000 km of balance road works under NHDP. Estimated outlay for BMP Phase I is Rs. 5,35,000 crore spread over five years between 2017-2022 as per the initial plan.

As per the revised funding plan dated September 2019, the dependence on market borrowings for increased substantially by 72% to Rs. 3,59,786 crore while the budgetary allocations and contribution from central road and infrastructure fund were reduced by 46% Rs.1,83,626 crore from Rs.3,43,045 crore. At the same time, the monetisation proceeds through auction of operational assets through toll-operate-transfer route are expected to contribute more than earlier estimates by 142% at Rs. 82,500 crore. Consequently, the borrowings of NHAI are expected to increase significantly and peak by FY2023; at the same time, NHAI's asset monetisation also remains critical to meet the funding requirements of BMP phase -I.For FY2021, NHAI's borrowing plan is estimated at Rs. 75,000 crore. The prevailing uncertainty due to Covid-2019 and the consequent impact on valuations could delay asset monetisation plan of NHAI - toll-operate-transfer auctions and launch of infrastructure investment trust. Depending on how quickly the normalcy is restored, these plans could take off by end of FY2021.

How do you assess the contract models, or a mix of them that contractors may not shy away? 

The share of the BOT (Toll) projects in the overall awards has declined sharply in last five years (awards are primarily through the EPC / hybrid annuity mode); thereby increasing the financial burden on the NHAI. In this context, NHAI is left with two options - a) to go slow on project awards or b) increase the mix of BOT (Toll) awards. Given the ambitious targets of Bharatmala programme, NHAI would be considering to increase the mix of BOT (Toll) awards. Risk averseness of road developers has increased over the last few years. Even today, many developers' balance sheets cannot support huge equity investments towards BOT (Toll) 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. Overall, these factors would make the 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, it is time to devise a new model on the lines of BOT (HAM) to reduce the upfront equity contribution for private developers to an extent. Also, the new model should have provision to re-negotiate contracts to protect the returns of developers in case of lower-than-anticipated traffic performance especially given the challenges in traffic forecasting currently on account of likely shift to other competing modes.

Could you throw some light on the steps taken for resolution of stuck projects under execution?

In May 2015, the cabinet committee on economic affairs (CCEA) had approved one-time fund infusion (OTFI) for languishing BOT projects. Projects that were at least 50% complete as on November 1, 2014 but stuck for want of funds were deemed eligible under OTFI for a special intervention in the form of a bridge fund. Further in March 2019, MORTH issued guidelines for resolution of stuck national highway projects on account of inability of the contractor / concessionaire to continue with the execution on account of proceedings initiated against it before the NCLT under Insolvency and Bankruptcy Code (IBC) or where there is a default on account of both the parties i.e. awarding authority and the contractor / concessionaire.

How do you assess the labour availability issues post covid?

Labour availability will remain a concern in near term; retaining migrant labour would be challenging.

As per Economic Survey, the total migrant workforce in India was estimated at over 10 crore as of year 2016. It is estimated that the total migrant workforce would have reached between 12-14 crore by 2019. Construction sector employs about 5-6 crore workers (including indirect workers) and a major part of it is migrant labour (estimated to be more than half of total labour employed in the sector).As per government data and estimates, about one crore migrant workers have been transported by Shramik trains and road transport in the month of May-2020.Since significant reverse migration of labour also took place in April-2020 and is likely to continue for some time, around 20% of the total migrant labour could be moving back to their native places. Some contractors were able to retain labour by providing them shelter and food for basic sustenance.

Based on our channel checks, labour availability has ranged between 60-70% for contractors engaged in infrastructure construction. Incentives from the central government schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) providing rural employment, subsidy schemes on food grains, and support provided by state governments, would make many labourers stay back in villages for a longer period of time. The labour shortage will be more severe in southern states and metropolitan cities from where labour has migrated enmasse. Real estate, building construction segment will see the most impact and reduced labour availability. The impact on road, railways, and irrigation segments will be relatively lower as majority of these projects are located outside the metro cities and would be able to source labour from nearby villages. Projects in Uttar Pradesh, Bihar, Odisha, Madhya Pradesh etc where the labour has migrated back will be better off, compared to projects in Andhra Pradesh, Gujarat, Maharashtra, Tamil Nadu and Telangana.

The investment in road sector over FY2020- FY2025 is estimated at Rs. 20.3 lakh crore which signifies the importance of the road sector.

The new model should have provision to re-negotiate contracts to protect the returns of developers in case of lower-than anticipated traffic performance.

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