The setting up of DFI with an initial allocation of Rs. 20,000 crore in the current budget is a positive.

Rajeshwar Burla

- Vice President, Corporate Ratings, ICRA

The new development finance institution (DFI) would be able to leverage and fund infra projects worth around Rs. 2 lakh crore (assuming D/E of 9:1). The target is to have a lending portfolio of at least Rs. 5 lakh crore for this DFI in three years, says Rajeshwar Burla, Vice President, Corporate Ratings, ICRA. Excerpts from the interview…

How do you assess the impact of the liquidity boosting measures by the government of India on the sector so far?

The Ministry of Road Transport and Highways (MoRTH) has initiated a slew of relief measures like shift from milestone-based billing (typically ranging between 45-75 days) to monthly billing and release of retention money / performance security in proportion to the work already executed among others, which has immensely supported the road contractors. These initiatives have helped in reducing the cash conversion cycle, while also getting the performance guarantees and associated margin monies released for the executed portion of the projects. Notwithstanding the high cost of re-mobilising labour, many road contractors made special arrangements to facilitate return of labour due to improved cash conversion cycle from MoRTH/ NHAI projects.

What has been the performance of the Roads and Highways sector in the year gone by, and what is your outlook for FY 2022?

Road contractors step on the gas; ably supported by the liquidity boosting measures by MoRTH and NHAI. The execution during 9M FY2021 stood at 7,767 km, 12% higher than 6,940 km in 9M FY2020. Adjusting for the first 20 days of April 2020 wherein no construction activity was allowed, the execution per day saw a growth of 21% to 30.5 km/day in 9M FY2021 from 25.2 km/day in 9M FY2021. The execution for FY2021 is estimated at around 10,500 km. In FY2022, the execution could surpass 11,500 km.

What are the funding challenges and what needs to be done on a war footing to attract investment?

Much of infrastructure financing in the country is currently supported by the banking sector. Availability of long-term infrastructure financing continues to remain a challenge given the twin problems faced by commercial banks — asset-liability mismatch and increase in stressed assets. Hence, the setting up of a new development finance institution (DFI) with an initial allocation of Rs. 20,000 crore in the current budget is a positive. The DFI would in turn be able to leverage and fund infra projects worth around Rs. 2 lakh crore (assuming D/E of 9:1). The target is to have a lending portfolio of at least Rs. 5 lakh crore for this DFI in three years. It may be recalled that 2-3% of the overall NIP is envisaged to be funded by the new DFI.

What is your take on the government's move encouraging the financial institutions (FIs) as eligible bidders and scaling down the bidding criteria, especially in road sector so as to encourage more number of bidders?

As high as 69 contractors have participated in bidding for NHAI EPC projects in last three years. While the tier-II EPC contractors graduated to development segment with launch of hybrid annuity model (HAM), the erstwhile sub-contractors (who used to execute for tier-I & II principal contractors) have started participating in EPC bids directly after gaining adequate technical expertise over the last one decade; resulting in increased number from of bidders vying for the EPC contracts. Given the limited fiscal bandwidth for states, new tenders are likely to remain muted from states in the near term. Similarly, the industrial segment could witness slowdown in new order inflows as the private players, amid the uncertainty on the demand, are likely to scale down/defer their capex plans. The recent relaxation of financial capacity and widening the definition of core sector (technical capacity) by including segments like hospitals, hotels, oil & gas, warehouses among others will drive more EPC players towards infrastructure projects, especially road, which is already overcrowded. The competitive intensity is expected to increase manifold.

How do you look at asset monetization scenario? What are the prerequisites for attracting the investors?

Investors prefer operational assets with a toll collection and O&M track record of at least five years. In this context, asset recycling through toll-operate-transfer (TOT) and NHAI InvIT provides investment opportunities to pension and sovereign funds. NHAI has taken multiple steps viz. reducing the size of the TOT bundle and reduced the concession period to 20 years from 30 years earlier. This would result in reducing the value of the bundle and there by enable participation from wider pool of investors. Three to four smaller bundles under TOT (each with a length of 140-150 km) along with NHAI's InvIT of about 600 km are likely to get concluded in FY2022. NHAI targets to raise upwards of Rs. 10,000 crore through monetisation.

How important it to have a judicious mix of awards that may attract more investments/participants in the sector? What are the challenges here? 

Around 90-92% of the awards over last few years were through EPC (wherein NHAI has to fund 100% upfront) and BOT - hybrid annuity (wherein NHAI has to fund 40% upfront and remaining 60% over a period of 15 years), therefore financial burden on NHAI has continued to remain high. Because of increasing concerns on rising debt levels of NHAI, the NHAI plans to revert to BOT(Toll) model. 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 development of alternate modes like dedicated freight corridor and inland waterways. 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, response to BOT (Toll) could be limited. Achieving financial closure also could be a challenge given these uncertainties. NHAI intends to award 8% of the projects through BOT-Toll route in FY2022.

As per your latest report, the total debt for the NHAI has increased by more than 3 times. What is the bearing of this on projects awards and execution?

The total debt for the NHAI has increased by more than 3 times to Rs.2.49 lakh crore as on March 31, 2020 from Rs. 75,385 crore as on March 31, 2017. The borrowings are expected to surpass Rs. 3.5 lakh crore by FY2023 to fund the Bharatmala Pariyojana programme. Given this, the importance of speeding up the TOT awards and other fund-raising initiatives (viz. InvITs) to meet the large funding requirements of the ambitious programme remains critical.

Land acquisition challenges and funding issues remain major hindrance for project awards. As a result of compliance to the land acquisition Act of 2013, the land acquisition cost for the NHAI increased from 21 lakhs per hectare in FY 2007 to more than 4 crore rupees per hectare currently. The average cost of award for the ongoing Bharatmala Pariyojana programme stood at Rs. 23.8 crore per km which is 54% higher than initial estimated cost of Rs. 15.5 crore per km largely on account of steep increase in land acquisition cost and prudent bidding by developers at a premium to NHAI's base price. This along with skewed award mix (predominantly EPC and HAM) is resulting in high financial burden on NHAI.

FY2022 is a crucial year for two reasons: a) the importance of government spending on infrastructure to revive the economy and b) the significant catch up required in the ongoing Bharatmala and allied programmes. Against this backdrop, the massive 32% increase in the budgetary allocation on capital spend for the Ministry of Road Transportation and Highways to Rs. 1,08,230 crore in BEFY2022 bodes well for the road sector. Including the IEBR (market borrowings) and asset monetisation proceeds for the NHAI, the total capital outlay increased by 35% to Rs. 1,98,230 crore in BEFY2022 from Rs. 1,46, 975 crore in BEFY2021.

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