Faultering road sector gets due attention, challenges remain: Icra

NHAI bid out only 1,156 km of road projects in FY13 as against 6,491 km of road projects awarded in FY12

Achieving financial closure has been a challenge for road projects – around 18 such projects awarded in FY12 could not achieve financial closure till 3 three months back, March 2013, due to uncertainty on land acquisition and approvals as well as reluctance by banks to fund these ‘aggressively bid projects’.
 
Icra in its report titled '' Indian Road Sector - recent steps to aid recovery '' said after awarding 6,491 km of roads in FY12, the road sector witnessed a slump in award of projects with only 1,156 km of road projects being bid out by NHAI in FY13 which is about 17% of the target of 7,000 km set for the financial year.

The lower project awards have been on account of weak interest from private sector participants due to difficulty in raising funds, stressed financial position of many developers, delays in getting right of way and clearances, relatively less lucrative stretches in the offering, as well as economic slowdown which has also impacted road traffic in the operational projects.

Furthermore, sales of automobiles (both passenger and commercial vehicles) have also witnessed de-growth in line with the slowing economic activities over the last few quarters which is likely to impact the future traffic (and hence toll revenues) until the economic activity revives.

Notwithstanding the sharp decline in project awards, the performance on the project execution front improved in FY13. Backed by strong pipeline of projects under execution, the completion rate for NHAI projects increased to 7.9 km/day in FY13 from average of 6.2 km/day in FY12. However, progress on the projects awarded in FY12 remained muted mostly in the absence of requisite right of way, clearances, and inability to achieve financial closure.

To reduce the uncertainty over land acquisition, NHAI has decided to award road projects only after substantial progress is made on the land acquisition and clearance fronts. Simultaneously NHAI has stepped-up its efforts on land acquisition.

However, the acquisition process is often elongated due to capacity constraints faced by NHAI and opposition from land owners primarily over the compensation amount. Furthermore, multiple clearances from different authorities required for project often adds to the time overruns and uncertainty.

Further, de-linking of environment and forest clearance, and proposal to ease raw-material (aggregate) supply have been positive developments, which are expected to aid project execution. Nevertheless, coordinated efforts from multiple authorities are required to further streamline and shorten the clearance process. In this regard, finance minister’s proposal of setting-up of a regulatory body for the road sector could go a long way in dealing with the challenges faced by the sector.

However, given the large investments being planned, Icra in its report said infrastructure development funds (IDFs) will assume greater importance in channelizing the much needed long term debt funds into road sector.

Rohit Inamdar, Senior Vice-President, Icra, “Many lenders have introduced stringent conditions like 100% right of way, clearance, and significant upfront contribution from promoters before the sanction/disbursement of the loan.

Bank lending to the sector was also constrained due to large requirement of the sector which could hit the internal sectoral exposure limit of some banks, and the unsecured tag associated with the road projects.

On the later front, in March 2013, RBI has allowed loans to PPP road projects to be treated as secured subject to certain conditions, which is expected to improve lending to the sector to some extent.”

Subsequently, Icra also feels that given the stretched liquidity issues, the industry is likely to witness both consolidation and exits in the near future.