Reforms cut risk, drive up highway construction: CRISIL

High-risk projects decline 13%, pace of execution to double in two years

Thanks to a healthy growth in traffic and reforms allowing developers to divest 100 per cent equity in projects two years after completion of construction, high-risk road projects in the sector came down by 13 per cent in FY16, compared to the previous year, an analysis showed.

According to the analysis -– done by CRISIL on 85 under-construction and 104 operational build-operate-transfer (BOT) and annuity projects awarded by the National Highways Authority of India (NHAI), spanning 16,600 km -– refinancing of debt by low-cost, longer-tenure loans played a big role in credit improvement of these projects.

The risks pertain to completion of under-construction projects and the debt-servicing ability of operational ones. The pace of construction also improved from an average 4.3 km a day in FY15 to six km in FY16.

Of the 104 operational projects, there was an 18 per cent reduction in both length (to 2,700 km) and outstanding debt (to Rs 19,650 crore) of high-risk operational BOT projects, compared with FY15. Consequently, 65 per cent of the operational portfolio had a debt service coverage ratio of 1x, compared with 55 per cent a year ago.

According to CRISIL, over the next two years, stronger developers will be able to raise funds for their under-construction portfolio through stake sales in their operational portfolio and from investment trusts. However, weaker developers still face a funding gap of Rs 6,300 crore, equivalent to three-fourth of funds required for their existing portfolio.

CRISIL Research Director Ajay Srinivasan said: “The material improvement in the pace of execution can be attributed to policy reforms by NHAI and facilitation by the government, which is also reducing delays. Given this, we expect the average construction per day for NHAI projects to nearly double to 11 km by FY18.”

The key policy reforms initiated include easing of the clearances process, ensuring 80 per cent land acquisition before the award of projects, premium rescheduling, allowing developers to fully exit operational road projects and introduction of the hybrid annuity model. Given that these reforms are largely aimed at reducing risk, private participation is set to pick up.

On reforms in land acquisition, CRISIL noted that of the 40 projects tendered by NHAI during 2015 and 2016 (calendar years), a large portion of the land was already in place at the time of tendering.

Within the 85 under-construction BOT projects, there has been a 10 per cent decline. As much as 4,600 km of projects are still in the high-risk category because delays in land acquisition and approvals have increased costs by 20 per cent or Rs 11,000 crore, and the financial health of sponsors remains weak. These stuck projects were largely awarded between FY09 and FY12 and the mitigation options for them include a one-time fund infusion through NHAI loans, and a change in sponsor.

CRISIL Ratings Director Sushmita Majumdar said: “Of the 4,600-km, high-risk, under-construction projects, 1,400 km have reached the provisional commercial operations date stage, but are still unviable due to cost overruns and weak sponsors. These projects need a whopping 60 per cent revenue growth to meet debt-servicing requirements. Refinancing, debt restructuring, premium deferment or acquisition by a stronger sponsor are the only solutions.”

The hybrid annuity model has a lot of potential since the developer is fully insulated from traffic risk and partly from inflation and interest rate risks. The award of projects through this mode would kick-start private-sector participation, as 60 per cent of the funding for these projects would need to be arranged by developers. However, bidding aggression on project cost and operations parameters, and funding mix for hybrid annuity projects need to be closely monitored. CRISIL indicates around one-quarter of the projects awarded so far could face challenge in debt-servicing.