A less bumpy road ahead

The last decade of private participation in the road sector exhibited a varying degree of stress and fortunes. Two indicators — traffic and inflation — suggest that 2017 shifted gears for many projects. Although the perils of demonetisation left an indelible mark on some projects, the sector is enjoying the influx of a new set of global sponsors taking over operating assets.

The question here is what is in store for 2018 and if one can expect a strong performance from road builders.

First, the sector showed encouraging signs, with road construction gaining pace.

New roads were built at an average of 25.2 km a day in the first quarter of FY18, against 22.5 km in the corresponding previous quarter. Land acquisitions too inched up due to fair compensation offered per hectare. This number jumped to ₹25.4 million/hectare in the first half year of FY18 from ₹9m/ha in FY14. Higher compensation per hectare and deployment of additional local level officers have fast-tracked land acquisition.

The government bids out projects under the hybrid annuity or BOT model only when 80 per cent land is available, while it is 90 per cent for the EPC route. But there are roadblocks. Overall, of the 482 road projects, 43 encountered cost overruns and 74 were delayed against the original cost and schedule, as per the Centre’s Infrastructure and Project Monitoring Division.

The innovatively packaged hybrid annuity model (HAM) projects, with a reasonable risk-reward profile, pulled up the spirits of new players and offered good growth potential for both EPC players and the NHAI. Unlike the previous version, where several EPC players outbid traditional developers in toll projects, the current model appears more sustainable.

Lenders have gradually warmed up to the HAM and financial closure has been achieved for many projects. Redressal measures such as arbitration awards gained limited traction due to the inability of road developers/project companies to provide bank guarantees.

Due to the financial difficulties faced by many developers in the sector, banks are wary of taking exposure in the form of bank guarantees, without adequate margins/collateral. At end November 35 cases were yet to submit bank guarantees.

On the contrary, allowing the exit of original sponsors led to entry of global players like Cube Highways and Brookfield as financial investors in many projects. Consequently, several stressed projects revived, due to new debt structures and fresh capital injections, and loan recovery is not much of an issue now. Several equity dilution deals helped debt-laden companies lighten the balance sheet, although they are still in debt.

While the Toll-Operate-Transfer model’s bidding process is underway, the documents indicate a long concession period. Therefore, investors for whom long-term returns are not an issue would be the ideal candidates. In this backdrop, the project could typically encounter multiple business cycles including varying inflation levels and other economic variables. Thus, the availability of base year traffic and revenue is imperative for the bidders to make accurate forecasts. Although an extension provision is available at the end of the concession’s target year, this may be inadequate to address the risk.

Mature assets — with an operational history of over four years — are undergoing a substantial debt structure realignment through access to capital market instruments. Strong project fundamentals underpin the financial strength of these projects. New refinancing models, such as infrastructure investment trusts (InvITs), bond issuance and Infrastructure Debt Funds allow long-term investors to hook on to these performing projects. Although there is a lull post the first road InvIT issue, many players are queuing up to issue units.

Finally, and most important, macro-economic indicators impact the transportation sector significantly. Given the good growth rate of 7.3 per cent (Fitch Ratings forecasts), the prospects appear on track and provide a rare opportunity to overcome long-term roadblocks and make meaningful progress.

The writer is Associate Director, Infrastructure Ratings, at India Ratings & Research. With inputs from Divya Charen C

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