Problems of the past continue to haunt NHAI
While the NHAI will bid out a much larger quantum of roads in the current year compared with what it awarded in the last two years, the government’s target of building 25-km-a-day or around 7,000-7,500-km-a-year, is a stretch. To begin with most developers remain financially over-leveraged and are therefore, not inclined to bid for PPP projects. Even if the NHAI is banking more on the EPC route to achieve its targets—of the 3,761 km that NHAI plans to award this year, three-fourths is to be build via the EPC route—there is no guaranteeing the build-out will happen. Given the many hurdles during construction, completing projects has become difficult. As a white paper by CRISIL points out, execution has fallen to 3.2 km per day in April-October 2014 compared with 4.3 km per day in the corresponding period of 2013, thanks to a large number of projects being held up and many abandoned.
Indeed, even where the roads have become operational, the delays and the lower than expected volume of traffic continue to hurt balance-sheets. CRISIL estimates that on average, a PPP project in the road sector faces a delay of 20 months while the average cost escalation is about 36%. Some of the major players, who over-extended themselves by building in the BOT mode, the average gearing was as high as 3.3 times at the end of March 2013. Moreover, virtually no player has been able to raise any equity in the last two years or free up cash from existing projects, which is why 22 PPP projects failed to attract any bids. And unless they put money on the table, bankers aren’t going to be forthcoming with loans; also given their experience, this time around bankers will back only very strong promoters. While some developers may be able to free up cash by selling road assets, there is a question mark on how much investment can be made by private sector developers in the next four or five years.At this point in time, it is hard to see them rustling up more than R3,000 crore of equity in a year which means the total annual investment, via the PPP route, is capped at close to R10,000 crore. That can take care of around 2,500 km annually which leaves NHAI with the responsibility of building the remaining 5,000 km via the EPC route, for the 7,500 km target to be achieved. While the sector has been thrown open to foreign investors, interest so far has been lukewarm with investors, not surprisingly wary of not just delayed clearances but also the lack of a dispute resolution mechanism. If it wants to get anywhere near its target, the government needs to put one in place quickly.