When the Covid-19 lockdown was imposed in the country in early 2020, the road sector faced unanticipated disruptions, ranging from derailed project execution to revenue losses due to the suspension of toll collection and a marked reduction in traffic. The market uncertainties caused by the pandemic have urged the government to implement innovative funding strategies to finance its highway development plans.
The government has also been taking initiatives to attract private investment in the sector by easing the bidding qualification criteria for EPC contractors and modifying model concession agreements for HAM and BOT projects. A number of other relaxations related to project completion deadlines, security deposits and performance securities in case of abnormally low bids have also helped in easing the liquidity constraints of highway developers and contractors. As compared to the previous year, the road sector has been less impacted by the ravages of the pandemic this year. Highway construction performance has been consistently improving since the third quarter of financial year 2021. The government and private developers have also discovered ways to continue making progress while keeping safety concerns and market uncertainties in view.
Improvement in road award and construction activity
Significant progress has been made by the Ministry of Road Transport and Highways (MoRTH) in building national highways across the country. The ministry achieved the record-breaking milestone of constructing almost 37 km of highways per day in 2020-21. It constructed 13,327 km of roads in financial year 2021 as compared to 10,237 km in financial year 2021. Meanwhile, the ministry awarded projects spanning 10,965 km in 2020-21, as compared to 8,948 km awarded in the previous fiscal. During April-July 2021, the ministry successfully completed the construction of 2,927 km of highways across the country, as against 2,657 km constructed during the corresponding period in the previous year. However, the award figure during the period stood at only 2,434 km, down from 2,702 km in the previous year.
In 2020-21, the National Highways Authority of India (NHAI) awarded 141 projects worth Rs 1.71 trillion, spanning a length of 4,788 km. The length awarded in 2020-21 was the highest in the past three years, compared to 3,211 km in 2019-20 and 2,222 km in 2018-19. Of the total projects awarded in 2020-21, two projects with a length of 132 km were based on the build-operate-transfer model, 69 projects with a length of 2,609 km were to be developed in HAM mode and the remaining 70 projects with a length of 2,047 km were based on the EPC model.
New records in road construction
Despite slow project execution amid the pandemic, the past year has witnessed some notable records in road construction. Patel Infrastructure Limited created a world record with the construction of the Manubar-Sanpa-Padra section of the Delhi-Mumbai Expressway in Gujarat. This made it to the Golden Book of World Records and India Book of Records. The section involved the highest quantity of pavement quality concrete laid by the world’s largest fully automatic ultra-modern concrete paver machine for the project within 24 hours. NHAI recently set yet another record by completing a single lane of a four-lane stretch of 25.54 km (NH-13) in a record time of 17:45 hours. The stretch is a part of the Bijapur-Solapur highway project, being executed by IJM India. The milestone will be entered in the Limca Book of Records.
Traffic and toll collections
On the operational front, the nationwide lockdown had serious implications for road traffic and toll collection of highway developers in the first quarter of financial year 2021. Toll collection was completely suspended for 25 days during the nationwide lockdown, causing a slump in toll revenues. While the lockdowns were eased thereafter, sustained protests by farmers in Punjab, Rajasthan and Haryana left about 58 fee plazas out of operation for 12-182 days during the year. As a result, NHAI incurred an estimated revenue loss of Rs 35.13 billion in fee collection in 2020-21. Despite the loss, the approximate user fee collections in 2020-21 stood at Rs 285 billion, slightly higher than the Rs 277 billion collected in financial year 2020. This can be partly attributed to the centre’s mandate to make FASTag compulsory at all national highway toll plazas from mid-February 2021 onwards.
In May 2021, owing to lockdowns imposed by multiple states during the second wave of Covid-19, the traffic volume dipped to 116 million. As the lockdown restrictions were eased, traffic picked up in June 2021 to reach 158 million. Overall, NHAI’s total toll collection during January-June 2021 stood at Rs 155 billion with a total traffic volume of 635 million. The authority could collect only Rs 78 billion through toll during January-June 2020, almost half of this year’s figure, with a traffic volume of 435 million.
Mounting debt a cause for concern
The losses in toll collection in the previous fiscal, coupled with enhanced expenditure by the government to achieve its road development targets, have put a serious debt burden on NHAI. The authority’s debt reached a new high of over Rs 3 trillion at the end of 2020-21. This debt figure is 27 per cent higher than the Rs 2.49 trillion debt recorded at the end of 2019-20. During 2020-21, NHAI paid Rs 188 billion as interest, while additional borrowings amounted to Rs 580 billion. Further, interest payments are expected to rise significantly in the next two to three years. Since 2017, NHAI has secured external borrowings worth Rs 30 billion and the Covid-19 pandemic has only worsened the debt trap. The MoRTH blames the several ongoing litigation cases for this crisis. Currently, about 140 arbitration cases are pending before various arbitral tribunals with almost Rs 919 billion worth of claims from contractors and Rs 446 billion counterclaims from NHAI. Another 240 cases are pending in courts with claims of Rs 216 billion.
Covid-19 has had a severe impact on at least the medium-term viability of projects. Traffic studies need to be revisited to take the pandemic into account. NHAI launched bids for the fourth TOT bundle in October 2019, with an initial bid submission due date of February 13, 2020. However, due to low investor confidence, NHAI had to withdraw the bundle in September 2020 after multiple bid extensions. Based on recommendations from a number of investors, the authority eventually decided to disclose the initial estimated concession value of the subsequent TOT bundles only after receiving the technical bids and declaring the selected bidder. The decision was taken to allow investors to freely bid for the projects amid the ongoing uncertainties regarding road traffic on different stretches under the new TOT bundles. In line with this policy change, NHAI launched TOT Bundle V in September 2020. The smallest asset monetisation bundle so far, TOT Bundle V comprised only two stretches in Gujarat with a total length of 159.5 km and a concession period of 20 years. The two stretches have finally been awarded to Adani Enterprises Limited and DP Jain & Company Limited. Meanwhile, NHAI has delayed the launch of its upcoming infrastructure investment trust (InvIT) till the road traffic becomes more stable. The InvIT is now likely to hit the market in September 2021.
Future outlook and opportunities
Overall, the outlook for the road sector seems positive. Despite suffering a major hit last year due to the first wave of Covid-19, the sector has been able to witness a swift recovery. The MoRTH is working towards achieving a per day construction target of 40 km in financial year 2022. NHAI has also been ensuring adequate funds availability to fulfil its targets under Phase I of the Bharatmala Pariyojana, which is expected to be completed by 2024-25. During April-July 2021, NHAI emerged as the highest investor (compared to other large central public sector enterprises) with a capex of Rs 410 billion, which is 34 per cent of the Rs 1.22 trillion target for the entire financial year.
Going forward, the asset monetisation programme is set to provide immense opportunities for investment in the road sector. On August 23, 2021, the central government announced its Rs 6 trillion National Monetisation Pipeline scheme. Roads will be one of the priority sectors under the scheme. The government will monetise road stretches worth Rs 1.6 trillion, spanning a total length of 26,700 km. In the current financial year, the ministry aims to monetise assets with an aggregate length of 5,000 km and a monetisation value of Rs 300 billion. The road sector is also expected to be the biggest driver of merger and acquisition activity in the next few years. While there are several operational projects that the government has identified for monetisation, the ongoing HAM projects will also offer lucrative acquisition opportunities to investors three to four years down the line.