NHAI pause on contracts likely to hurt construction firms' revenue

Gadkari said NHAI was in a comfortable position and it would go ahead with its fund-raising plans

The Union government’s focus on the build-own-operate model of road construction may “adversely” impact the revenue visibility of construction players operating in the road segment in the medium term, India Ratings and Research (Ind-Ra) has said.  

According to Ind-Ra, revenue visibility of players operating in the roads segment would be impacted negatively in the medium term on account of any slowdown in fresh awards by the NHAI. 

Coupled with the NHAI’s plan to return to privatisation of roads by reverting to the BOT model can adversely impact bidding participation from private players, given their limited appetite and lenders' risk averse approach, the ratings agency said in its latest report. BOT would reduce dependence on the NHAI’s own funding, thereby reducing stress on its balance sheet. 

This would, in turn, translate to fewer contracts under the government-funded or the EPC (engineering, procurement, and construction) mode. The NHAI’s reliance on the EPC model has increased since FY16, due to a decline in participation from private players on account of persistent issues in the BOT model, said the report.

Under the BOT model, private players have to bring in equity and tie-up debt funding to execute the orders. Lenders have also become risk averse to BOT model on account of higher leverage and issues pertaining to land acquisitions.

NHAI has started prioritising its bidding process under the EPC model, where the project debt would be funded through NHAI sources. This has led to an increase in NHAI’s market borrowings to Rs 28,000 crore in FY17 from Rs 26,900 crore in FY15, and further to Rs 62,000 crore in FY19.

These observations come at a time when the Prime Minister’s Office suggested that the road ministry focus on monetising the existing road projects through either Toll-Operate-Transfer model or Infrastructure investment trusts (InvIT).

Union Road Transport and Highways Minister Nitin Gadkari at the 100-day press conference on Monday said NHAI was in a comfortable position and it would go ahead with its fund-raising plans.

The minister also said the officer who posted PMO’s letter on social media has been suspended. “PMO had circulated the letter to nine departments and we also received that report. One of our ministry officials received that report and posted it on social media, we have suspended him,” Gadkari told reporters in Mumbai.

The minister assured that the financial situation at the NHAI was under control and Union Finance Minister Nirmala Sitharaman had asked the road ministry to award more projects and spend more in the road sector.

As part of its fund raising for the current financial year (2019-20), the NHAI is working on a plan to raise a minimum of Rs 85,000 crore through asset monetisation till FY2024-25 through ToT and InvITs.

InvITs are innovative vehicles that allow developers to monetise revenue-generating real estate and infrastructure assets, while enabling investors or unit holders to invest in these assets without actually owning them. InvITs will be for monetising projects and mobilise additional resources through capital markets.

All completed projects for monetisation through ToT/InvlTs after two years of operation and all the BoT (Toll) projects will be considered for monetisation immediately on completion of the existing concessions.

Another innovative model of financing for NHAI is through National Investment and Infrastructure Fund (NIIF) for formation of a Special Purpose Vehicle with equity contribution from institutional financial investors.

Debt will be raised by the SPV to ensure off-balance sheet funding of projects. Construction risk will be borne by NHAI.

NHAI is also working to raise long term finance from banks by securitising the user fee receipts from fee plazas as alternate mode of asset monetisation.

Funding from multilateral agencies such as JICA, JBIC (Japan Bank for International Cooperation) and World Bank are being explored for specific SPVs to develop greenfield corridors on a case-to-case basis.

The road ministry has suggested that part of the planned funding could be invested in the SPV being set up by NHAI and NIIF and funds could be utilised for construction of expressways under the Bharatmala scheme, which aims at construct 20,000 km of highways connecting western and eastern parts of the country at an estimated investment of Rs 7 trillion.