Easing financial burden, preventing project failures and protecting jobs are a must if sector’s to preserve its health.
By Akshay Purkayastha and Anshuman Chauhan
The Novel Coronavirus (Covid-19) pandemic ravaging economies worldwide will have a significant impact on the buildout of roads and highways, a key enabler of India’s growth. To appreciate its high multiplier effect on the economy, consider that the Centre alone spent ~ Rs 1.7 lakh crore on it in the last fiscal. Include spending by the states and the figure would probably more than double. With the pandemic throttling prospects of this funding and the economy coming to a standstill, the road signs are clear for the government and the private sector: Go slow, Work in progress.
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Toll revenue loss on NHs to hit the government and players hard
The immediate casualty for the National Highways Authority of India (NHAI) and private players would be generation of toll revenue. The economy would restart only gradually post lockdown, which has been extended till May 3. We forecast a 90-100% toll revenue loss for national highways (NHs) in April, 60-75% in May and 30-40% in the rest of the quarter. A gradual ramp-up of traffic is assumed after the lockdown, with the economy returning to normalcy post June. These are initial estimates, and, dare we say, optimistic ones based on the currently available Covid-19 numbers.
We expect developers/toll operators to incur toll revenue losses in the range of Rs 3,450-3,700 crore during the March-June period, while the NHAI would suffer revenue losses of Rs 2,100-2,200 crore.
Indirect losses and delays to impede sectoral growth
In addition to revenue losses, there will be significant indirect losses. For example, the NHAI and private road developers/ contractors have over Rs 2 lakh crore of debt each. Every month of delay is expected to cost the sector over Rs3,000 crore as the accrued interest burden.
Covid-19 will also affect the NHAI’s asset monetisation programme. There would be delays in the NHAI’s toll-operate-transfer (TOT) bundles, specifically the ongoing TOT Bundle 4 bidding (the deadline for which has already been extended) and the ready-to-bid-out TOT Bundle 5. The NHAI’s plan of floating an infrastructure investment trust (InvIT) could also be delayed. Suspension of tolling during the lockdown and the gradual recovery thereafter will make it hard for potential investors to estimate traffic and, thus, value assets fairly. Moreover, with their road and highway assets losing value, it will be difficult for the existing players to invest in new assets .
The slowdown in construction will lead to significant cost and time overruns. We also expect a rise in disputes between the private sector and the government authorities, with claims being filed by developers/contractors/toll operators.
Given these significant sector-wide losses, there is an imminent possibility of a slowdown in project rollouts, deterioration in the financial health of companies, and job losses. This can be damaging for economic recovery.
What can be done?
We believe the government and the sectoral authorities should take decisions expeditiously to mitigate the damage.
Some measures that can be adopted are:
Ease the financial burden
The government should try to leverage land bonds to pay for land acquisition, easing the burden on agencies such as the NHAI. This method is popular in Taiwan, South Korea and Ireland and is being tried in Kerala. Long-term land bonds (10-15 years) for land acquisition can be issued in lieu of cash compensation. These should be tradeable, ensuring cash to landholders. Further, land bonds should be included in the statutory liquidity ratio (SLR) of banks, to create liquidity for bonds.
Land pooling as a mode of land acquisition should also be explored by the authorities. Under this, a government agency consolidates fragmented land parcels for development of infrastructure assets along with some developed plots for redistribution to landowners. With developed land plots being the primary mode of compensation, the expenditure of the agency involved in asset development is greatly reduced. This method has been widely used in India for urban development (Chandigarh, Naya Raipur, Navi Mumbai, etc.) and can be used by the NHAI to preserve precious resources.
Prevent project failures
The infrastructure authorities should provide immediate relief to contractors/developers to instil confidence in the sector. The pandemic is a force majeure event and interpretation issues should not delay relief measures. Compensation should be paid for losses incurred for a defined period (say, monthly) and disbursed on a rolling basis.
Regional/project offices should be empowered to make immediate payments up to a threshold. Independent engineers/authority officials should initiate estimation of revenue losses in PPP concessions, i.e. design-build-finance-operate-transfer (DBFOT) projects, on a war footing. The compensation should be paid expeditiously. Moreover, adjustment/extension of the remaining concession period for build-operate-transfer (toll)/DBFOT projects should be carried out with immediate effect.
The authorities should concentrate on rolling out projects under the EPC mode and work with the developer community to quickly restart all stalled projects. This will ensure that the large number of construction workers rendered jobless by the shutdown are quickly absorbed in highway projects located close to their homes.
These steps are well within the government’s capacity and can save a significant number of jobs and prevent a build-up of infrastructure-led non-performing assets.
Akshay Purkayastha is Director and Anshuman Chauhan is Associate Director, Transport & Logistics, CRISIL Infrastructure Advisory