Lower gross domestic product (GDP) growth estimates are threatening to throw road projects off track. A number of highway projects awarded since 2005 had spurred estimates of an eight to nine per cent growth in the country’s gross domestic product. Now, with a lower than seven per cent GDP growth, these projects are for a reality check.
Traffic growth in road projects is generally calculated to be 0.8-0.9 times the GDP growth. 6.9 per cent growth rate in the GDP in the July to September quarter means the traffic growth was below six per cent — on an average, across the country.
This is bad news because the industry had expected traffic to grow in the range of seven to eight per cent this year. “There will definitely be a slowdown in toll revenue growth,” says Ankineedu Maganti, managing director of Soma Enterprise. “It is directly proportional to the the country’s growth.”
Another road project developer (who refused to be named) said one might have to revise the toll growth numbers.
IRB Infrastructure Developers concurs. Its chairman and managing director, Virendra Mhaiskar, says the earlier projections appear optimistic now.
Manufacturing output grew a mere 2.7 per cent for the second quarter. This has a direct relation with the movement of cargo on highways. Vikash Sharda, senior manager at PricewaterhouseCoopers, says the most affected will be the highways that are in industrial areas and dependent on industrial activity. “Lesser cargo movement on roads will impact toll collections and revenues,” he adds.
The immediate impact on toll revenue growth will be seen on road projects that are currently operational. But experts also say the impact could be worse on projects that have given huge revenue share — on a premium — to the government. These projects assume huge growth in traffic to make up for the premium. If the GDP does not pick up by the time these projects are operational, they might be hugely impacted.
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Uniform impact
Toll road companies, however, claim that the impact of slower growth will not be uniform across all the highway projects. Notes Soma’s Maganti: “In some road projects, the impact might be higher. In others, it might be lower.”
Soma has a road project in the Bangalore-Hosur section, which connects the electronic city to the main city. The growth of traffic on this road would depend on function of the information technology (IT) industry and the population growth in the area. The company does not see much impact of the latest growth numbers on this highway. “But we have a project in Surat which connects to the port and is dependent on imports and exports. That could see an impact,” says Maganti.
Port-connecting highways could do well, according to Sharda, since the export and import volumes have been growing. “We did not see a drastic fall in exports and imports,” he adds.
Experts say states in the western region will contribute positively towards the GDP, while those in the east will have a negative impact. IRB Infrastructure, too, sees no uniform impact of slowing GDP across states.
The company claims traffic across its entire range of projects is growing at around nine to 10 per cent.
“The average GDP growth is 6.9 per cent, but there are some states which are still growing in double-digit numbers,” points out Mhaiskar. “Our projects are in such states. We see no reason of traffic growth falling below six to seven per cent.”
Recently, toll rates have gone up, as they are linked to inflation, which had been rising. However, this may not make up for the slowdown in traffic volume.
“Our construction costs and operation and maintenance costs have been going up as well,” says Maganti.
What appears to have worked in favour of IRB is the graded approach in making traffic growth assumptions. “We have staggered traffic growth for our Ahmedabad-Baroda project,” points out Mhaiskar. “There is not much to worry for companies who have done this.”
With National Highways Authority of India recently awarding all but one of the 45-odd projects — with a premium of Rs 1,900 crore annually — the situation is also a wake-up call for builders as well as the government.
Companies have bagged projects by offering attractive premium to the government which is higher than even the project costs. Experts say some of them may become unviable if the traffic projections are unrealistic.