Highway Sector shifting gears to regain momentum: India Ratings

The recent policy initiatives could act as a stepping stone for revival of the road highway sector, India Ratings and Research (Ind-Ra) has said in a report. Rescheduling of premiums and the 5:25 refinancing schemes have provided some respite to special purpose vehicles (SPVs). Introduction of the hybrid annuity model (HAM) and infrastructure debt funds further highlight the government’s focus on addressing the rising need for devising an efficient and flexible financing path.

However, Ind-Ra has observed that it could take a decade to complete the  road projects targeted under National Highways Development Programme (NHDP), if projects are executed at the historical average.

The pace of project execution by the National Highways Authority of India (NHAI) has been sluggish at 5.6 km per day during the past five years and was sub-par in FY15, with daily construction dwindling to 4.1 km per day from an all-time high of 7.4 km per day in FY13. While the recovery of the highway sector is certainly on the cards, the pace of recovery  is contingent upon the timely execution of policy measures and an economic milieu conducive to meet the immediate funding requirements of the sector.

The total national highway length grew at a meagre 3.9 per cent compound annual growth rate (CAGR) in FY05-FY15, way slower than proliferation of freight and passenger traffic at 8.8 per cent and 7.8 per cent, respectively, during the same period. Further, the project award rate has also been volatile with a high of 17.8 km per day and a low of 3.1 km per day in FY12 and FY13, respectively.

“The execution rate will have to treble from the current level, if the pending projects planned under the NHDP programme have to be completed in the next five years. There is a pickup in award of road projects in Q1 FY16. While only five (734 km) of the 35 projects were taken up under the build, operate and transfer (BOT) mode in FY15, three projects with a length of 343.8 km (nearly half of the length awarded in FY15) have already been awarded on a BOT basis in Q1 FY16. A total of five projects were awarded in Q1 FY16 on the engineering, procurement and construction (EPC) model,” Ind-Ra notes.

The budgetary allocation to the road sector for FY16 has also been increased by a staggering 125 per cent; however, channelising these funds in the right direction at the right time coupled with timely implementation of reforms will be key to the revival of the sector.


Inflation-linked toll rate hikes have been a saving grace for most toll road projects for past two to three years, disguising, to some extent, the declining traffic. Notwithstanding the higher leverage observed, this has helped in propelling toll income, enabling SPVs to post earnings before interest, taxes, depreciation, and amortisation margins of around 80 per cent on an average.

Though challenges remain in terms of timely clearances and award of encumbrance-free right of way, the performance levels of various projects, in pockets, have improved. An outlay of Rs 2.21crore (at current costs) needs to be pumped into the highway sector to complete the pending projects planned under NHDP. The estimated capital requirement is over and above the timely infusion of funds in case of a shortfall in cash flow for debt service obligations and any potential cost overrun, a phenomenon not so uncommon for road projects.

According to an Ind-Ra report, projects stalled during construction stage could incur an increase in costs of nearly Rs 10-15 lakh per km on a monthly basis. “In addition, in a majority of toll road projects in Ind-Ra’s portfolio, the traffic has under-performed by an average of 33 per cent from the traffic projections in the first year of operations. This could translate into a notional loss of Rs 50,000 crore in the decade ahead, if bidding continues to be at such aggressive projections.”