Funding crunch, rising construction costs may derail India’s roads sector

Funding crunch, rising construction costs may derail India’s roads sector

With NHAI and the private sector re-strategising, the funding crunch and increasing construction costs may derail the country’s roads and highways sector. Recently, the Prime Minister’s Office (PMO) stated to NHAI that the Government is reportedly not keen to sustain its large investments in building highways. Further, as per reports, industry analysts and highway developers are of the opinion that the private sector, too, is not keen, as it is becoming more risk-averse in the highways sector.

Commenting on the issue, RajeshwarBurla, Vice-President & Associate Head-Corporate Ratings, ICRA,says, “The PMO only advised NHAI to be prudent in terms of borrowing by raising funds through asset monetisation by tapping alternate funding avenues such as toll-operate-transfer (TOT) and infrastructure investment trusts (InvITs), and at the same time award projects where the funding requirement from NHAI is lowest. Around 90-92 per cent of the awards over the past few years were through EPC (wherein NHAI has to fund 100 per cent upfront) and BOT (hybrid annuity or HAM, wherein NHAI has to fund 40 per cent upfront and the remaining 60 per cent over a period of 15 years) modes and the financial burden on NHAI has continued to remain high. The total debt for NHAI has increased by more than 2.4 times to Rs 1.79 lakh crore as on March 31, 2019 from Rs 753.85 billion as on March 31, 2017.”

NHAI will continue to raise debt to fund the expansion of road infrastructure, reportedly stated Union Minister for Road Transport and Highways Nitin Gadkari. It is said to be in talks with the State Bank of India (SBI) and the Life Insurance Corporation (LIC) of India to raise Rs 750 billion this year. 

“The risk sharing is not balanced in the current BOT (toll) model,” adds Burla. “Therefore, it is time to devise a new model on the lines of HAM to reduce the upfront equity contribution for private developers to an extent and to provide the requisite right of way/approvals to eliminate execution impediments. Also, the new model should have the provision to re-negotiate contracts to protect the returns of developers in case of lower-than-anticipated traffic performance.” 
According to a SBI Cap Securities report, the construction costs of highway developers have surged, led by a 30 per cent annualised growth in average land acquisition cost from 6.8 million per hectare in FY2013 to 34 million per hectare today. 

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