While the government is busy setting aggressive targets for road construction across the country, the problem of stalled projects and operational build-operate-transfer (BOT) projects is far from being resolved.
An analysis of such projects by Crisil shows that weak financial condition of sponsors, cost and time overruns and low growth in toll revenue are making projects unviable. Almost 7,500 km of highway projects awarded on BOT basis face implementation risk. While 5,100 km are under construction, 2,400 km are operational.
Almost 80 per cent of these 5,100-km long high-risk projects have suffered delays and cost overrun on account of issues related to right-of-way (ROW) (land issues) and the inability of sponsors to bring in more equity. In a bid to revive stalled projects, the government has, over the last year, eased clearance processes. The exit clause in operational projects as well as financing options in stressed projects has also been eased. The government has also moved away from the BOT model to hybrid annuity structure where the National Highways Authority of India (NHAI) will fund 40 per cent of the costs.
Green-shoots are visible as there has been an uptick in the private sector interest over the last few months. An official in the Ministry of Road Transport and Highways (MoRTH) said: “We have taken several decisions in the last few months to enthuse private interest. Developers can now take out their entire equity in finished projects to undertake new ones. There has also been a rise in projects awarded this year.”
Stress on delayed projects
An analysis of 92 highway BOT projects, most of which were awarded between 2010 and 2012, reveals that they are facing implementation risk. The report points that many projects witnessed aggressive bidding from new players entering the BOT space and are now stressed for finances and they are in need of timely equity infusion and support from sponsor. At least 37 per cent of under construction projects with a length of 3,520 km and sanctioned debt of Rs 33,050 crore have been classified under high implementation risk as they have already seen substantial time and cost overrun. While they have been delayed by over 30 months, less than 70 per cent of the project work has been completed. For some projects, the completion rate is lower than 30 per cent.
The report says that sponsors will have to arrange for around Rs 28,500 crore for completion of under construction projects. The financial health of sponsors has raised concern over their ability to provide capital for such projects and fund the cash flow mismatches of operational BOT projects. The risk is higher in projects worth Rs 12,500 crore as it is expected that around Rs 16,000 crore can be raised through accruals and borrowings and from healthy portfolios of operational assets. “As of now, there is no solution in sight to bridge the gap,” said the report.
Stressed operational projects
In cases where the project has been completed but the firm has high debt on its books, a lag in growth of toll revenue is putting pressure on their ability to service their debt.
Virendra D Mhaiskar, CMD, IRB Infrastructure said that the toll operators are facing issues related to revenue growth. He said that while the tariff of most toll projects are linked to inflation, a decline in inflation has resulted into no tariff revision and this is reducing their ability to service debt. He said that a decline in interest rates will, however, cover up for some of the shortfall.
The report suggests that almost 40 per cent of the operational BOT projects are at high risk and while their revenue growth has been around 10 per cent, they need a toll revenue growth of 37 per cent as there are zero toll-rate hikes. An analysis of 80 operational BOT-based highways (of which 51 are toll-based and 29 annuity-based) shows that 26 projects covering 2,385 km are at high risk and have an outstanding debt of Rs 17,100 crore. Of these, 24 toll-based projects have an outstanding debt of Rs 16,760 crore and have been classified as high risk because of the cash flow mismatch. The total debt of the 51 toll projects stands at Rs 27,750 crore.
By comparison, the annuity-based projects are not at risk and 95 per cent of them meet their debt obligations. Eight operational toll-based projects having an aggregate debt of Rs 6,230 crore and two annuity-based projects with a debt of Rs 365 crore have been classified under high-risk category.
“A major challenge for operational toll-based highways is the big variation between base traffic estimates at the time of awarding and actual traffic. This has impacted their overall toll collection and therefore the debt servicing ability,” said the report. Experts feel that support from sponsors would be crucial along with the need to hike toll revenue.
The road ahead
The government has set a target to award 10,000 km of highway projects in the current financial year. It has also given nod to Bharat Mala project that aims to develop 6,000 km of new roads in border areas at an estimated cost of Rs 76,000 crore. Another 2,500 km of roads to connect religious and tourism centres in mountainous terrain is expected to come up at an estimated cost of Rs 51,000 crore. Also, highways will be developed to connect 123 of the 676 district headquarters in the country at an estimated cost of Rs 96,000 crore. With the BOT model causing pain for private players and NHAI in the past, the government has shifted from BOT model to hybrid annuity model. Under this model, projects would be awarded based on annual payment to be received by the developer after construction and NHAI would fund 40 per cent of the cost of the project.
As far as existing stressed projects are concerned, there is some hope on account of various steps taken by the government. The government has been looking to address land acquisition problems and fast-track clearances. It has also allowed NHAI to extend developer loans to projects that are more than 50 per cent complete and almost 50 projects qualify for such loans. In case of operational projects, removal of restriction on exit clause is expected to have big impact. According to Crisil, “Stake sale in operational projects can help raise around Rs 5,000 crore, which can be used for existing commitments or for future growth capital.”