The Ministry of Road Transport and Highways is likely to seek bids for as many as 30-40 road projects in the next two months. While both the ministry and the National Highways Authority of India (NHAI) hope to complete their targets by bringing out projects, industry experts say the projects may not receive competitive bids this time.
Highway companies are currently battling increased costs due to a rise cement and steel prices. “Prices of all the construction material have gone up. Steel prices alone went up by 15-20 per cent in the last six months,” said Ankineedu Maganti, director, Soma Enterprises. Last month, cement prices also rose by Rs 10-15 per bag across the country.
In the prevailing scenario, companies are likely to estimate construction material costs higher and bid conservatively for the new projects. “Along with increased input costs, interest rates have also gone up,” said Virendra D Mhaiskar, chairman and managing director, IRB Infrastructure.
“From the last two months, there would be an impact of 0.75 percentage points on interest rates,” said Ankineedu Maganti. Currently, the interest rates for loans to road projects are in the range of 11.5-12 per cent, and also indicate an upward trend. Around 70-75 per cent of project costs are funded by debts, and this explains rising costs incurred by companies. Even as interest rates are expected to go up, credit flow to road projects may be smooth, as infrastructure is a productive sector, as indicated by the recent RBI policy.
However, high interest rates and inflation will alter the bids for new projects. Vishwas Udgirkar, senior director, Deloitte, feels that there would be a 10-15 per cent impact on the viability gap funding, which is given out by the government for road projects. Viability gap funding is a government grant to keep toll collections at an affordable level. Companies which bid the lowest grant, wins the project. For a few lucrative projects, companies offer a revenue share to the government, as opposed to claiming the grant. In these cases, the percentage of revenue offered to the government would go down.
While costs are likely to go up, traffic growth projections have not increased — a double whammy for infrastructure companies. “We have reduced traffic growth projections in several areas for 3-4 years as they have not grown as expected,” said Ankinedu. Even if traffic growth is robust in the future, they would not affect the bids in the next few months. “Traffic growth is a long-term call. Even if traffic grows at 10 per cent, it will be long term, whereas costs are immediate. Higher growth will not impact inflation and high interest rates entirely,” said Udgirkar.
Experts say that while bids may be conservative, given that not many projects were given out by the government in the last few months, many companies are expected to bid for them. However, companies may go in for a fewer number of projects, compared to what they would have earlier.