The road sector has been through many lows in the past year. Factors such as an economic slowdown, the general elections, and a crisis in the financial sector contributed to the slowdown in highway construction. The Covid-19 pandemic was another blow to the transport sector. Suspension of construction and tolling activities during the nationwide lockdown, mounting debt of contractors and developers, reverse labour migration, etc. were some of the challenges impeding sector growth. However, the road sector has been one of the few to have been able to weather the storm and swiftly regain normalcy. It presents multiple opportunities despite the risks. Opportunities under the National Infrastructure Pipeline are huge – a total capital investment of Rs 20 trillion has been planned for the sector during 2020-25. Meanwhile, investor sentiment is high, buoyed by the government’s asset monetisation drive.
Ballooning numbers despite disruptions
Acute labour shortages had a bearing on highway construction in the April-May period of 2020-21. Only 847 km of highways were constructed in the country during this period as against 1,692 km in the corresponding period last year. Even before the onset of Covid-19, construction had slowed down in 2019-20, largely due to the general elections in May 2019 and a liquidity crunch. The outbreak of the pandemic only made matters worse. Project execution, however, improved significantly in June 2020, with an additional 976 km constructed during the month, as compared to 463 km constructed in June 2019. During the first half of 2020-21, the Ministry of Road Transport and Highways (MoRTH) successfully completed construction of 3,951 km of road length. It has achieved a construction pace of 21.6 km per day despite the Covid-19 disruptions.
Toll collections were completely suspended for 25 days during the lockdown, causing a slump in toll revenues. However, despite slow traffic growth with the lifting of the lockdown, average toll collections have now improved to over 90 per cent of pre-Covid levels, led by a faster recovery in commercial traffic.
Award activity has improved significantly despite the lingering fear of Covid-19. The National Highways Authority of India (NHAI) awarded 40 projects spanning 1,330 km in the first half of 2020-21. This is 1.6 times higher than the 828 km awarded in the first half of 2018-19 and 3.5 times higher than the 373 km awarded in the first half of 2018-19.
NHAI has taken various measures in response to the pandemic to provide relief to contractors and developers. In March 2020, the authority disbursed Rs 100 billion through online payments and ensured that no payments remained pending due to its offices being closed during the lockdown. In the first quarter of 2020-21, it disbursed over Rs 150 billion to vendors. Additional steps such as monthly payments to contractors were taken to ensure cash flow to them. More recently, NHAI allowed highway developers an additional three-month leeway (till December 31, 2020) to meet completion deadlines that have been pushed out owing to the Covid-19 pandemic. The deadline extension will be granted without the imposition of any additional costs or penalties, but only on a case-to-case basis. Loan moratoriums, provision of Covid-19 loans, and partial release of bank guarantees were some of the other key relief measures taken in the past few months to alleviate the concerns of stakeholders.
Role of asset monetisation – A silver lining?
Amidst declining private sector investment in the economy, fundraising and expenditure by NHAI has become crucial to boost the confidence of the private sector and global investors. To this end, NHAI will be launching an infrastructure investment trust (InvIT) soon, for which it had received the union cabinet’s nod in December 2019. The authority has initiated the process of setting up its InvIT to scout for funding in the highways sector. However, it may have to settle for lower valuations due to the impact of the pandemic. There will be strong demand among investors for the InvIT, especially if it is priced attractively, owing to the healthy performing assets on offer. NHAI’s InvIT will be the first public sector InvIT in the road sector, which currently has three operational investment trusts by private developers with four others in the offing.
With regard to asset monetisation via the toll-operate-transfer (TOT) model, NHAI has decided to do away with the practice of announcing the initial estimated concession value or the reserve price for TOT projects to deter private firms from cartelisation. It has withdrawn the tender for the fourth TOT bundle to modify it according to this recent policy change of not disclosing the base price for TOT tenders. Further, the fresh tender will see revised model concession agreement and request for proposal documents. Meanwhile, NHAI has invited bids for TOT Bundle V without a base price as the authority looks for better price bids for its operating assets. Under this, separate bids have been invited for Bundle 5 (A-1) and Bundle 5 (A-2), each consisting of one national highway stretch in Gujarat. The total length of the bundles is 159.5 km.
After delays due to Covid-19, Cube Highways and Infrastructure, which emerged as the highest bidder for TOT Bundle III, was eventually able to tie up Rs 35 billion worth of funds with the State Bank of India (SBI) in one of the largest financings in the road sector in India.
NHAI plans to offer 19 projects worth Rs 350 billion under the InvIT model and raise over Rs 100 billion through the TOT route, as earmarked in the 2020-21 interim budget. This seems to be a unrealistic target in the light of the ongoing pandemic.
Technologies leading the way
A slew of digital initiatives were taken by NHAI and the MoRTH to enhance transparency, ease dispute resolution and monitor projects in real time. In one of its biggest reforms, NHAI has gone completely digital with the launch of a unique cloud-based and artificial intelligence-powered big data analytics platform – Data Lake and Project Management Software. All project documentation is done, and contractual decisions and approvals taken only through the portal. In order to ensure timely payments to vendors, submission of bills related to project payments will also be done through the Data Lake portal. In early 2020, the MoRTH launched GATI, a new web portal for contractors/concessionaires. It can be accessed from the NHAI website and contractors/concessionaires can raise any project-related issue on the portal.
Opportunities intact
NHAI plans to construct 22 new expressways and economic corridors across the country by 2025. Spanning 7,800 km, these expressways will be built at an investment of Rs 3.3 trillion. Some of the key projects include the Bengaluru-Chennai Expressway, the Delhi-Mumbai Expressway and the Ahmedabad-Dholera Expressway.
NHAI has also increased the focus on the quality and safety of highways. The development of model highway stretches, performance rating of consultants/concessionaires/contractors, ranking of highways for quality check, etc. are steps in this direction. Further, in a bid to encourage local players, the MoRTH has barred Chinese firms from participating in road projects in India, including through joint ventures. This is aligned with the centre’s motto of a self-reliant India.
Towards recovery
The hybrid annuity model (HAM) is finding few takers in the current falling interest rate scenario. A consistent drop in bank rates has adversely affected cash flows in HAM projects. Interest rates/Costs of borrowing have not reduced with the falling bank rate and hence valuations have fallen abruptly. As a recommendation, payments from NHAI should be linked to the State Bank of India rate rather than the Reserve Bank of India bank rate. Due to swollen debt, NHAI cannot completely rely on the engineering, procurement and construction mode of project award. Further, Covid-19 related disruptions have made traffic forecasting difficult, thereby deterring developers from build-operate-transfer (BOT) (toll) concessions. As NHAI is in favour of awarding projects in the BOT (toll) mode to reduce its debt burden, it has recently revised the concession agreement. The industry response to this is yet to be gauged. Thus, for the time being, it is best for NHAI to focus on asset monetisation (both through the TOT and InvIT route) and redeploy those funds for new highway development. The sector is brimming with acquisition opportunities for both small and large players, especially now that smaller TOT bundles are on offer.