The Covid-19 pandemic has had a bearing on almost all infrastructure sectors and the road sector is no exception. While road developers and contractors have been facing a slump in revenues and profitability, implementation models with high risk for developers seem to have lost their attractiveness further. However, the shoots of recovery can already be seen in the marginally improved traffic numbers and project execution rates. The complete ramping up of the sector is expected to take at least 15-18 months. Besides, the crisis is also expected to play a key role in determining the implementation mix of upcoming road projects. Although the general consensus is that the government has been diligent in supporting the industry to tide over the crisis, uncertainty regarding the extent and timeliness of compensation still persists. At a recent India Infrastructure conference on “Road Development in India”, industry experts discussed the impact of Covid-19 on the sector, their response to the crisis, initiatives taken by the government, future outlook and the key priority areas in the post-Covid world…
What has been the impact of Covid-19 on the road sector?
Akhil Gupta
Covid-19 has impacted project execution and revenues for all road contractors. As far as Afcons is concerned, we have been able to generate only about 40 per cent of the revenues in the first quarter of 2020-21 as compared to the same period in the previous fiscal year. Given the company’s unavoidable fixed costs, the pandemic is also expected to have an impact on overall profitability, liquidity and cash flows. Operations in the second quarter of this year are expected to remain subdued due to the general difficulty in project execution during the monsoon season. We expect to reach 70-75 per cent of revenues by the third quarter of 2020-21. Overall, Covid-19 is expected to have an impact of about 20 per cent on revenues on average during the current fiscal year. However, the growth targets that we have planned will be able to offset the revenue losses to some extent.
Sudhir Hoshing
Almost every highway developer has been impacted by the Covid-19 pandemic. During the lockdown, toll collections were suspended. This was coupled with large-scale labour migration and a halt in construction activities. Finally, as toll collections resumed in April 2020, traffic started to rise from 10-15 per cent to 20-30 per cent, and eventually to about 80 per cent of the pre-Covid levels. Meanwhile, 50-60 per cent of the labour is back and construction has resumed, albeit slowly. Safety measures have also been taken for labour at construction sites.
Muraleemohan M.
While Covid-19 has had some impact on the sector, I feel that the toll roads have been able to show some resilience, as compared to other infrastructure sectors. Although tolling was completely suspended for 25 days on the national highways, it continued on the state highways for longer. The pickup in other industries post the lockdown gives hope that the worst is behind us and traffic will not plummet to such low levels again. However, traffic figures are now beginning to stagnate at 90 per cent since the manufacturing sector will take time to pick up. Having said that, we expect to close the year at about 85 per cent of the normal traffic levels. Displacement of labour has impacted routine maintenance as well as major construction and maintenance works. The impact of Covid-19 is likely to be felt in 2021-22 as well, while normalcy is expected to return from 2022-23. Traffic growth will hover at 5-6 per cent for the next year.
T.R. Rao
The impact of Covid-19 on construction and operations for FY 20 was not significant since only the last 20-25 days of the fiscal suffered the effect. However, during the current fiscal year, the period from April to June, which is considered the golden period for construction, suffered the strongest impact of the crisis. Not only has the first quarter’s performance been impacted in 2020-21, we expect the performance in the second quarter to be subdued as well owing to the monsoon. However, despite the ongoing uncertainty, we hope to make up the shortfall of the first two quarters of 2020-21 with enhanced performance in the last two quarters. While 75-80 per cent of the labourers are back on our construction sites, skill-set mismatch among labourers from different states continues to be a challenge. Besides, on the toll operations side, while commercial traffic has now reached about 90 per cent of the pre-lockdown levels, passenger traffic is still ramping up slowly and remains subdued. The overall revenue impact on our build-operate-transfer (BOT) (toll) and operations-maintenance-tolling (OMT) projects stands at 15-20 per cent.
Sandeep Reddy
The nationwide lockdown led to a complete shutdown of operations. We could achieve 70-80 per cent normalcy only by the first week of June 2020, since in May, even though construction activities had been allowed, there were issues regarding procurement of raw materials and other logistics issues. Labour availability continues to be an issue and we are struggling to get back our workers. In the past few months, project execution has been smoother in Uttar Pradesh, while it has been highly difficult in states such as Odisha and Maharashtra due to labour availability issues and other administrative restrictions on construction activity.
Going forward, we expect labour costs to escalate as a result of the enhanced need to provide healthcare facilities and other kinds of incentives to get them back to the construction sites. We hope that the government takes this cost escalation into account since it is bound to have a bearing on the profitability of road contractors.
Overall, project execution is expected to be impacted by 15-20 per cent during 2020-21 due to the Covid-19 crisis. Normally, we aim for a yearly growth of about 15 per cent; however, this year, we are aiming to maintain at least the previous year’s sales figures. Material and equipment availability is not an issue any longer and labourers are expected to return to worksites soon. However, funding of projects is going to be a major challenge in the coming times. Lack of adequate bank guarantees has severely impacted the financial health of the road sector by limiting the ability of contractors and developers to bid for new projects. The government should focus on the working capital needs of contractors, so as to make bank guarantees easier to come by.
What has been the industry’s and the government’s response to the pandemic?
Akhil Gupta
The government has been trying to do quite a bit in terms of releasing performance bank guarantees, extending project completion timelines, releasing retention money, etc. However, the initiatives need to be translated on the ground effectively and in a timely manner to benefit contractors.
The National Highways Authority of India (NHAI) and the Ministry of Road Transport and Highways (MoRTH) should announce upcoming engineering, procurement and construction (EPC) projects which will provide a huge opportunity to contractors. Also, while there has been significant progress in dispute resolution, a lot of challenges still need to be addressed, particularly those surrounding arbitration cases. While NHAI and the MoRTH have been effectively implementing central government guidelines, the same needs to be ensured across all the other relevant departments.
Sudhir Hoshing
Although the government has been prompt in providing time extensions for concession agreements and moratorium on loans for up to six months, it is not sufficient to cover the interest and operations and maintenance (O&M) costs. Such losses have impacted BOT (toll) projects. However, hybrid annuity model (HAM) projects have witnessed a lower impact. Compensation for BOT (toll) projects will depend on the declaration of Covid-19 as a political or non-political event.
Muraleemohan M.
Since the outbreak of the pandemic in India, both the MoRTH and NHAI have been very active with regard to engagement with different stakeholders. Besides, it is worth mentioning that the road sector received a specific mention from the government in the Atmanirbhar lecture series. Although the government announced the extension of concession agreements by up to six months and release of bank guarantees as part of the Covid-19 relief package, there are issues surfacing in implementation. Besides, there is lack of clarity regarding force majeure. When toll collections are suspended, the lack of proper relief measures poses a challenge for BOT projects.
T.R. Rao
The government has been taking initiatives such as release of bank guarantees and retention money, and rationalization of Schedule H for payments, granting extension of time among other measures. Although the government has compensated for the loss of time through extension of concession agreements, clarity regarding the compensation for revenue losses on account of lower output is still not there. The compensation for such losses is contingent upon the agreement on Covid-19 as a political force majeure event by the authorities.
HAM projects have construction and investment as two crucial elements. The pandemic has had a significant impact on the construction component due to slower project execution and other overhead costs. As far as the investment component is concerned, the extension of concession agreements will not be sufficient to cover the additional interest costs suffered by the developers on such projects.
A representation has been made through the National Highways Builders Federation and have also made a recommendation to the MoRTH to change the HAM benchmark from the bank rate to the marginal cost of funds-based lending rate (MCLR) as there is a wide gap between the two rates. Thus, in the case of HAM projects that are linked to the bank rate, the banks should consider aligning it with the MCLR. At some point in time, there is a need to deleverage HAM projects and recycle the investments, but the high risk associated with the bank rate and O&M costs can have a serious impact on the value investors place on such projects.
Sandeep Reddy
NHAI has been extremely supportive of contractors during the crisis. The authority has changed the payment terms from Schedule H and is now focusing on monthly payments to contractors. This initiative should continue at least for a year since despite the availability of land, EPC contractors are often unable to execute the project as per the norms of the contract agreement and following Schedule H becomes a challenge, resulting in a lot of funds being held up. The government has also been working on the release of retention money, which is appreciated. However, more clarity is sought on the compensation under the force majeure clause, and NHAI is yet to provide this. We feel that the Covid-19 pandemic should be treated as a political force majeure event and contractors should be compensated accordingly. The authority’s new reconciliation process has also been successful in ensuring timely dispute resolution. We hope that the government speeds up the tendering process, since procurement has been quite slow in the past one year. There is a need for procurement to pick up to provide a stimulus to the economy.
We have been working with numerous sub-contractors and a few of them are working on road projects being implemented by various state governments. They are facing issues with regard to timely payments, as the state governments are themselves struggling with funds during this crisis.
What is the outlook for the sector based on the current situation?
Akhil Gupta
The road sector is one of the key sources of revenue for our organisation and we hold a positive outlook for the sector in the long run. Although the pandemic has led to a slowdown in the short term, we expect activity to pick up in the long run. Investments planned under the National Infrastructure Pipeline (NIP) over the next five years are expected to provide a boost to the sector.
The share of HAM in overall project awards is expected to go down and EPC is likely to become more dominant in the near future. The outlook for HAM will also depend upon the success of the TOT bundles due for bidding, as asset monetisation supplements sources of funding for NHAI. The pace at which the economy picks up is also an important factor in deciding the implementation mix since this will determine the level of toll collections.
In these times when people are losing jobs, infrastructure projects can provide opportunities for employment generation. Hence, we hope that the government will announce a lot of infrastructure projects in the time to come. Currently, the government is also facing funding and liquidity issues due to heavy expenditure on the various ongoing welfare schemes. Keeping this in view, the ramping up of the economy may not happen in the next 15-18 months. Complete normalcy may only be expected by the end of 2021-22.
Sudhir Hoshing
It will be hard to implement expressway projects on a BOT basis due to uncertainty of traffic. However, other kinds of projects may well be implemented on BOT basis and we will be actively looking out for those. Before Covid-19, the government had plans to come up with about 20 BOT projects, of which only two-three have been put up for bidding till date. We recommend that NHAI focuses on BOT projects to ease the funding constraints being faced by the authority, given that the traffic is expected to reach a sustainable level in the near future.
Meanwhile, FASTags have actually had a positive impact on toll revenues. Not only has the pass-through traffic time reduced substantially, it has also simplified the toll collection process, especially for passenger vehicles.
Going forward, the government will continue to focus on road development in the country and accord due preference to the road sector. The year 2020-21 is all about sustaining oneself during the crisis, despite the revenue losses. The next year is expected to balance out the losses incurred during the current fiscal, while growth can be expected in 2022-23. The huge pipeline of projects planned by the government will soon be put on the block, providing the needed impetus to the sector.
Muraleemohan M.
The road sector has no other option but to improve in the coming fiscal year, given the importance it has for the country’s development. The government has given a massive thrust to the sector through programmes such as the BharatmalaPariyojana and the investments envisaged under the NIP. The different types of implementation models available support a wider variety of investor classes, as compared to about five years ago when there was only one type of model and one type of investor class. A lot of backlog is being accumulated this year that needs to be dealt with in the next fiscal. As far as mergers and acquisitions are concerned, I feel that transactions can be expected to pick up rapidly from the last quarter of 2020-21 since many investors believe that it will be the right time to invest in the sector. By then, the uncertainties posed by the pandemic will begin to get resolved, giving way to shoots of revival.
As far as BOT projects are concerned, on the one hand, BOT (toll) projects offer opportunities for growth, while on the other, they increase the risk for highway developers. Looking back at the history of concessions, it can be said that significant improvements have been made in the areas of land acquisition, exit clauses, implementation models and so on. However, in Covid-19 times, contract enforcement is an area that still needs to be worked upon. Frequent toll suspensions will make business models unsustainable. Having said that, due to the growth opportunities offered by toll-based concessions and their direct linkage with traffic growth, we will continue to have a significant share of our portfolio on toll-based concessions. The long-term sustainability of HAM depends on a lot of factors such as wholesale price index and bank rates. With the increasing involvement of pension funds and infrastructure investment trusts, the country’s secondary market has become more robust. As a result, investors are more willing to invest in projects with medium returns but high stability. Thus, asset sales will become difficult for HAM projects, owing to their highly unstable nature.
T.R. Rao
The year 2020-21 will be a critical and challenging one for the road sector like many other sectors. However, the outlook for next year seems promising, as we are hoping that we will be able to come out of the pandemic. The investment worth about Rs 22 trillion envisaged for the road sector in the NIP will provide a plethora of opportunities for highway developers in the coming years. We are hopeful that the government will continue to focus on reviving the sector, hence, the positive outlook for the coming years.
Talking of the outlook for the BOT mode of project implementation, we can say that even before the outbreak of Covid-19, BOT (toll) projects had been facing the issue of construction delays due to persistent land acquisition challenges. Completion of projects in a time-bound manner and declaration of commercial operation dates as per the scheduled timelines are extremely crucial for BOT projects. Besides, there is an issue of inadequate and narrow contractual provisions on the development of competing roads along toll highways that needs to be resolved.
What has been the state-level experience? What is likely to be the level of interest in BOT projects? What will be the key priority areas going forward?
Akhil Gupta
We engage a lot of subcontractors in the highways and the bridges segments. As an organisation, we believe that while we struggle for cash flows during difficult times, we still need to help our subcontractors to ensure timely project execution. We have been ensuring timely payments to them to avoid any backlog and to help them tide over the Covid-19 crisis.
We have adopted various technology interventions to enhance efficiency in project execution. All our systems and data processes have been digitalised for several years now. Apart from this, the company’s equipment is also being tracked and monitored digitally for quite some time now. However, Covid-19 has provided an opportunity for employees to become more comfortable in adapting to digital platforms and embracing technological interventions. The entire organisation has been able to work from home effectively.
Sudhir Hoshing
Our prime interest remains in BOT. Apart from this, full annuity models will be preferred over HAM due to interest rate risks on outstanding annuity payments under HAM. We have also been bidding for TOT projects. However, the interest in TOT depends upon how much money can be generated and at what cost.
With regard to state-level projects, we have a TOT project, the Mumbai-Pune Expressway, as part of our portfolio. However, we are not actively looking out for state projects due to their low project cost, as compared to national highway projects.
Muraleemohan M.
A large part of our portfolio comprises state road projects. Overall, the experience with state governments has been mixed. During the implementation phase, state governments have been highly supportive in mitigating various issues such as land acquisition. Besides, working with state governments is easier as compared to NHAI, due to their simpler construct. However, issues with state support start surfacing during the O&M phase. Besides, in situations such as the Covid-19 pandemic, coordination with the state governments gets a bit challenging. No state government has come up with a Covid-19 relief package for its road developers so far. Going forward, we would continue to look at upcoming opportunities in state road projects.
T.R. Rao
While we are not completely rulingout BOT projects, but our focus in the near term will be specifically on EPC and HAM projects. Besides, developers with the ability to handle both construction and operation may look out for HAM projects, despite the associated risks of steep reduction in bank rates post bidding.
Talking of state road projects, we have been undertaking a quite a few of them and already completed the construction work for Package I of the Agra-Lucknow Expressway project for UP Government. Other projects under execution include two packages of the Purvanchal Expressway for UPEIDA and one package of the Mumbai-Nagpur Expressway for MSRDC. So far, our experience with state projects has been satisfactory. However, we do agree that state governments may face funding issues due to the economic fallout on account of Covid-19, which might impact the budgetary allocations for state sponsored highway and expressway projects in the coming years.
Sandeep Reddy
Our company has been in the construction industry for the past five decades. In the mid-1990s we took up a number of projects under the National Highways Development Programme and the Golden Quadrilateral project. We also got into BOT projects 2006 onwards. However, in the past five years, our experience in BOT has not been very good due to the increasing financial strain on the company from such projects. Hence, we have decided to concentrate only on EPC contracts in the highways segment in the coming years. Going forward, we would definitely be participating in more projects in the sector.