Despite the government's recent steps to alleviate the problems in the road construction sector, 53 per cent of the highway projects under construction under the build, operate and transfer (BOT) framework are at risk of never being completed, a Crisil report released on Tuesday finds.
“About 5,100 km of BOT [build, operate, and transfer] highway projects, or around 53% of those under construction in India, are at high risk of not being completed because of delays in land acquisition and clearances, and weak wherewithal of sponsors,” the report titled ‘No smooth ride’ said.
The report found that 37 per cent of BOT projects, of 3,520 km, are in the ‘high implementation risk’ category. ‘High implementation risk’ means that less than 70 per cent of the project has been completed and the delay in completion is expected to be between 12-18 months.
Making matters worse is the fact that about 2,400 km, or 40 per cent of the total length of operational BOT highways, are not in a position to service their debt on their own due to lower-than-estimated traffic and resultant toll collections. Thus, the report finds, a total of 7,500 km of projects (both under construction and already operational) are at risk.
“In the next two years, these projects require a toll revenue growth of around 40 per cent in order to service their debt obligations. That’s a tough ask considering that toll rates are linked to WPI inflation, which is in negative territory. And traffic has just started to inch up and is yet to reach double digits in most cases,” said Sushmita Majumdar, Director, Crisil Ratings.
Apart from delays in land acquisition and clearances, one major problem the report cited was the financial weakness of the sponsors of these projects.
Raising funds
The report finds that to ensure that the under-construction projects progress on schedule, their sponsors will have to raise around Rs. 28,500 crore. The stronger sponsors should be able to raise Rs. 6,700 crore through accruals and borrowings, and they should be able to raise an additional Rs. 9,300 crore in the next few years through the recently introduced reform measure of allowing 100 per cent exit from projects two years after completion.
However, this leaves a gap of Rs. 12,500 crore over the next three years that the weaker sponsors do not have the wherewithal to raise at the moment, the report said.
Another source of problems, the report says, has to do with the timing of the project bids. “The majority of the projects under stress today were bid between fiscals 2010 and 2012 and involved acquisition of large swathes of land. Most were aggressively bid for, leading to high premium payments. Funding avenues then tapered leaving sponsors unable to finance projects at hand,” the report said.
Govt. policies
Reform measures initiated by the government have helped, Crisil says. The new policy that allows developers to exit projects following their completion, in particular will help highway projects and their developers. Not only can the funds raised through this route help in turning around stressed projects and meet existing commitments, a change in promoters could also open up new avenues of finance, the report says.
