A slowdown in traffic growth, cost overruns due to delays related to clearance and land acquisition issues and off-the-mark initial traffic projections have meant that road developers in India are currently largely failing to secure decent returns for their projects, according to a report by Crisil.
The research firm analysed data from over 15 national highway projects in the country and found out that overall traffic growth, which was estimated to have grown at 7-8 percent between 2008 and 2011, fell sharply to 3-4 percent in 2012 and 2-3 percent in 2013.
This was solely due to a slowdown in commercial vehicle traffic, which overshadowed a healthy 15 per cent average growth in passenger vehicle traffic during the period, the report said.
Commercial vehicles contribute 75 percent to toll revenues nationally.
Given the slowdown in the economy, commercial-vehicle traffic growth is expected to grow at a measly 2-5 percent in the current and next fiscals, Crisil said.
"Every 1 percent drop in traffic growth over a concession period can result in a 0.75-1 percent decline in project returns," it added.
Base year traffic lower than NHAI estimates
"Apart from slow traffic growth, base traffic (in the first year of a highway's operation) has been much lower than NHAI estimates. In the case of 6 national highway stretches (for which NHAI's traffic estimates are available with us) base traffic was found to be 20-40 per cent lower," according to the report.
While developers would have done their math before embarking on a project, NHAI's estimates being way off the mark should be concerning, it added.
Delays and resulting cost overruns another worry for road developers
Another factor that must be should weigh on the financial viability of projects is cost overruns due to delays, due to land acquisition and clearance issues.
"Of the total 78 build-operate-transfer projects completed between fiscals 2000 and 2013, more than three-fourths – or 61 projects -- faced delays," Crisil said. "The situation has only worsened in the last couple of years. Execution hasn't begun for about 33 projects awarded in fiscal 2012 (aggregating 4,650 km and roughly two-thirds of the total length awarded that year).
Six projects that Crisil analysed had witnessed average cost escalation of nearly 23 percent. "And a 10 per cent increase in cost lowers project returns by about 1 percent."
Project returns hit, debt-servicing ability low
All this has meant that road developers are "being buffeted from all sides", the report said. "If lower base-year traffic and cost overruns were not enough, slow traffic growth has made matters worse."
Crisil said that out of six projects it analysed, the average debt service coverage ratio for five was seen coming down below 1. "This means equity infusion is essential to ensure timely servicing of debt, especially since tying up for additional debt will be difficult in the current scenario."
As a result, "returns for these road projects are also expected to be 8-14 per cent, much lower than the 22-26 per cent returns based on NHAI traffic and cost estimates."
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